MEMORANDUM OPINION
CARPENTER, J.Page 2
Introduction
Before this Court is an appeal by Sun Life Assurance Company of Canada ("Sun Life") from an administrative decision issued by the Insurance Commissioner for the State of Delaware (the "Commissioner") denying Sun Life's request for refunds of gross premium taxes paid on employer- and trust-owned life insurance policies issued pursuant to private placements for tax years 2001 to 2003. For the reasons set forth below, this Court hereby reverses the decision of the Commissioner and finds in favor of Sun Life.
Facts
Sun Life Assurance Company of Canada is an insurance company incorporated in Delaware and is a wholly-owned subsidiary of Sun Life Financial, Inc. As part of its services, Sun Life offers corporate-owned life insurance policies ("COLI") which includes employer-, trust-, and bank-owned life insurance which is insurance a corporation can purchase to cover one or more employees. Through COLI, employers are able to help finance the cost of broad-based welfare benefit plans such as health and pension plans for their employees and retirees.
Stipulation of Facts ¶ 1.
Recognizing that employer- and trust-owned life insurance policies represented a large source of potential tax revenue for Delaware, in 1994, the Delaware General Assembly modified the general premium taxing statute relating to insurance by creating a graduated tax schedule for such policies. By adopting this graduated tax rate schedule, companies would be rewarded for increased volume of such policies and the Legislature hoped to secure a greater share of this tax revenue stream over other states. The tax rate was calculated on the basis of net premiums received per "case" in each calendar year, and the tax rate schedule has not changed since the passage of House Bill 615 in 1994. In February of 1998, House Bill 426 was passed by the Legislature amending 18 Del. C. § 702(c)(2)b and altered the definition of the term "case" in three ways — (1) all uses of the word "single" were deleted, (2) additional uses of the word "all" added, and (3) the definition itself was expanded.
See H.B. 615, 137th Gen. Assem., (1994).
18 Del. C. § 702.
The declining tax rate structure set forth by 18 Del. C. § 702(c) is as follows: Net Premiums Per Case Premium Tax Rate First $10 million 2.0% $10 million — less than $25 million 1.5% $25 million — less than $100 million 1.25% $100 million and over 1.0%
The original 1994 definition of "case" in relevant part provides:
For purposes of this section, a "case" is all contract issued to a single employer or trust established by a single employer or individual (or group of employers or individuals that participate in a single private placement under federal securities laws).
The 1998 definition of "case" in relevant part provides:
For purposes of this section, a "case" is (i) all contracts issued to an employer, a trust established by an employer, or an individual, as appropriate; or (ii) all contracts issued to all employers or trusts that participate in a private placement under federal securities laws and/or purchase with respect to at least 25 lives policies covered by registrations under such laws.
After the 1998 amendment, Sun Life issued a series of seven (7) COLI policies to seven separate banks on separate dates, with separate beneficiaries, separate policy numbers, and separate case names through separate private non-federally registered securities placements. Neither party disputes that each of the policies were separately issued under its own private placement nor that none of the policies are part of the same private placement. These seven policies are at issue in this dispute.
Final Findings of Fact, Conclusions of Law and Order, R at 000013.
Id.
See Appellee's Br. at 16 (listing all seven policies in dispute).
After the 1998 amendments, the Delaware Department of Insurance ("Department") took the position that the term "case" continued to include only those policies issued to participants in a single private placement. For tax years 2001 to 2003, Sun Life reported each policy separately as a "case" and computed the premium tax separately for each policy, consistent with the Department's position. However, believing the Department was misreading the 1998 amendments, Sun Life subsequently amended their returns and reported all of the separate policies as one "case" and computed the tax accordingly. This would have resulted in a refund that the Department has declined to issue.
Final Findings of Fact, Conclusions of Law and Order, R at 000012-13.
Id.
Procedural History
As a result of the Department's denial of the refund, on November 24, 2004, Sun Life submitted a request for review to the Department of Insurance with respect to 18 Del. C. § 702 and their request for refunds of premium taxes on the grounds that the meaning of the terms "case" and "private placement" as used in 18 Del. C. 702(c)(2)b allowed each of Sun Life's private placements of life insurance contracts to be treated and taxed together for premium tax calculation purposes.
Appellant's Br. at 1-2.
An administrative hearing was held on July 26, 2005 to address Sun Life's request. Prior to the hearing, both parties agreed to a briefing schedule and also agreed that the decision of the Hearing Officer would be the Commissioner's final decision and order for purposes of appeal pursuant to 18 Del. C. § 328. In addition, the parties submitted a Stipulation of Facts and a Joint Exhibit List to the Hearing Officer for his consideration.
R at 000074.
R at 000069-74.
R at 00069-77.
On November 25, 2008, the Hearing Officer issued his Final Findings of Fact, Conclusions of Law and Order in favor of the Department's reading of 18 Del. C. § 702(c)(2)b. The Hearing Officer denied Sun Life's request and application for a net refund of $850,429 of gross premium taxes allegedly overpaid for tax years 2001 to 2003 for employer- and trust-owned life insurance contracts issued pursuant to private placements.
Appellant's Br. at 5-6.
Sun Life filed a timely petition for review and notice of appeal with this Court. On appeal, Sun Life asserts that the Hearing Officer erred as a matter of law interpreting 18 Del. C. § 702(c)(2)b as requiring that all of Sun Life's policies/contracts at issue be characterized as separate "cases" and taxed as such. After reviewing the briefs filed by the parties, the Court requested that they respond to a series of questions to clarify the record and what had procedurally occurred before the Hearing Officer. After those responses were received and because of the unique issue of first impression in the Court, it held oral argument.
Standard of Review
In most cases, administrative appeals to the Superior Court receive clearly erroneous standard of review. However, where there is a question of statutory construction and application of that statute, the Court's review is plenary and is not bound by the agency's conclusion. Thus, the Court's review is de novo and the court may accord due weight, but need not defer to the agency's interpretation of the statute.
Stoltz M gmt. Co., Inc. v. Consumer Affairs Bd., 616 A.2d 1205, 1208 (Del. 1992).
Id. (citing E.I. du Pont de Nemours Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985)).
Public Water Supply Co. v. DiPasquale, 735 A.2d 378, 381-82 (Del. 1999).
Discussion
The issue before the Court is whether separate employer- and trust-owned life insurance policies which were issued pursuant to separate private placements may be aggregated or are required to be separated within the meaning of "case" under Title 18 Delaware Code § 702(c)(2)b. Sun Life contends that the term "case" as amended in 1998 allows the aggregation of all policies issued pursuant to a(ny) private placement. However, the Department contends that each policy issued pursuant to a private placement is a separate "case" within the statute.
It is important for the Court to first emphasize that it is not the place of the Court to decide the wisdom of the legislative action that has caused this dispute or even whether it was in the best interest of the State to pass this legislation. That is within the provision of the General Assembly, and this Court will not invade into their Constitutional responsibility. However, it does take this opportunity to plead with the members of the House and Senate that the creation of a clear legislative history and the articulation through hearings, comments on the floor of their chambers, or through related writings are critical to ensure their intent can be determined and the purpose behind the legislation enforced. This is particularly critical when the legislation involves a complex and technical issue such as the one now before the Court.
When the Court inquired of counsel why no testimony was presented to the Hearing Officer regarding the legislative history of the 1994 and 1998 legislation the following response was provided by the State:
The reason that the Insurance Commissioner presented no testimony to the hearing officer during the administrative proceeding in 2005 regarding why
18 Del. C. § 702(c)(2)b was proposed and the purpose of the amendment is that there appears to be no definitive legislative history for the initial legislation or the amendments to § 702, other than the synopses from the two bills . . . In my preparation of the Answering Brief in this matter, I obtained and reviewed from Bernard Brady, the Secretary of the Senate, an audio CD containing the House and Senate session recordings for the 1998 legislation (H.B. 426, as amended by House Amendments Nos. 1 and 2), during which this bill was considered and voted on by both Houses. However, I did not hear any relevant discussion by any member of the General Assembly or any witnesses regarding the underlying purpose for the proposed amendment as it relates this matter.
When a similar question was asked of counsel for Sun Life, they responded:
In that respect, in briefing this issue for the Insurance Commissioner and again for the Court, we exhaustively
researched the 1998 revisions to the original 1994 enactment, but were unable to locate specific evidence respecting the identity of who drafted the 1998 revisions specifically at issue here, or any clear evidence of the motivation behind the changes.
When the Court advised counsel that it appeared that the legislation was the result of a legislative task force created to review this area, counsel for the Department of Insurance stated:
In response to your Honor's reference to a task force, efforts were made to identify task force members and to locate a task force report related to the 1994 legislation, but those efforts have been unsuccessful. To the best of my knowledge, no task force report was ever produced, despite the formal creation of the "Insurance Industry Economic Development Task Force" pursuant to House Joint Resolution No. 4 (as amended by Senate Amendment No. 1 on June 30, 1993), which was passed by the 137
th General Assembly on June 28, 1993, and signed by the Governor the following month.
Unfortunately as a result of the lack of legislative record, instead of clearly knowing the intent of the General Assembly, the Court, in interpreting this statute, must revert to court created rules of construction that all would agree are not a very satisfactory substitute. Hopefully these comments will help future members of the General Assembly appreciate the importance of clearly articulating the purpose of their legislation and of creating a legislative history to ensure that purpose is not misconstrued by the Court.
Under the circumstances where there is a lack of clear information regarding the intent of the legislature in passing a particular piece of legislation, courts must apply well established rules of construction in an effort to interpret the statute. The goal of statutory construction is to attempt to determine and give effect as intended by the legislature. At times legislative intent can be gleaned from the statute itself and its underlying purpose. Furthermore, the Delaware Code indicates that "[w]ords and phrases shall be read with their context and shall be construed according to the common and approved usage . . ." When reviewing material where there are changes in the language of a statute, the legislature can neither be assumed to have regarded such changes as without significance, nor to have committed an oversight that the change was enacted inadvertently. The party who avers that no change was intended in a law by a legislative amendment has the burden of establishing that intent.
Levan v. Independence Mall, Inc., 940 A.2d 929, 932 (Del. 2007).
Fassett v. Christiana Care Health Serv., Inc., 2010 WL 2433183, at *2 (Del. Super. June 17, 2010) (citing Cole v. Del. League for Planned Parenthood, Inc., 530 A.2d 1119 (Del. 1987)).
1 Del. C. § 303.
73 AM. JUR. 2D Statutes § 132 (2001).
Stiftel v. Malarkey, 384 A.2d 9, 13 (Del. 1977).
It is also well established that in reviewing taxing statutes, any doubt regarding the breadth of the statute must be construed against the taxing authority and in favor of the taxpayer. "The general principle is well settled that revenue laws are not to be so construed as to extend their provisions beyond the clear import of the language used, or to enlarge their operation so as to embrace matters not specifically pointed out, although standing in close analogy."
Consolidated Fisheries Co. v. Marshall, 32 A.2d 426, 429 (Del. Super. 1943), aff'd, 39 A.2d 413 (Del. 1944).
Id.
Using the above as its guide, when the Court compares the 1994 to 1998 amendments, it is clear that material changes were made to 18 Del. C. § 702(c)(2)b. In particular, there are three major differences in the 1998 amended definition of "case." First, the Legislature deleted all uses of the word "single." Second, additional uses of the word "all" were added, and lastly, the definition of "case" itself was expanded. Most importantly "case" is not an insignificant word or concept in this statute. It is the underlying basis for the determination of the very tax structure the Legislature intended to use for the creation of additional revenue. Therefore, the Court finds that such changes in the legislation were material, and as such, the rule of statutory construction presumes that a change in meaning was intended.
Giuricich v. Emtrol Corp., 449 A.2d 232, 238 (Del. 1982); see also C T Assoc. v. Gov't of New Castle, 408 A.2d 27, 29 (Del. Ch. 1979).
By using the word "single" in the definition of "case" in the 1994 enactment, the statute was clear on its face that policies were only to be associated with one specific private placement. However, in the 1998 amendment, the deletion of "single" was never replaced with a synonymous word which would describe a "single" or "one" private placement. The deletion of "single" has also led to multiple interpretations of "case" and has given rise to an ambiguity in the statute. Both sides concede that such ambiguity is present in the 1998 amendment.
When a statute is ambiguous, the Court should attempt to determine the Legislature's intent in making the statutory amendments. Both Sun Life and the Commissioner have presented plausible suggestions as to the legislative intent derived from the sparse legislative history available. Sun Life submits that a reading of the 1998 amendment in their favor furthers the purpose of the legislative synopsis of the original legislation adopted in 1994 which allowed Delaware to reap additional premium tax revenues. In particular, by recognizing that COLI policies represented a source of potential tax revenue for the State, the Legislature intended to secure a greater share of that nationwide revenue by offering insurers a competitive edge — the declining tax structure. They assert this goal was carried forward in the amendment by allowing the aggregation of these policies which would result in a tax benefit to companies with the hope of increasing the volume of policies written under our laws, thus generating more revenue for the State.
Metrodev Newark, LLC v. Justice of Peace Court No. 13, 2010 WL 939800, at *4 (Del. Super. Feb. 18, 2010) (citing Snyder v. Andrews, 708 A.2d 237, 241 (Del. 1988)).
The Commissioner submits that while the original legislation was intended to allow Delaware to economically benefit from this insurance business, the legislative synopsis of House Bill 426 reflects that was not the Legislature's intent as to the 1998 amendment. The legislative synopsis set forth in House Bill 426 states: "This Bill makes technical and position changes to House Bill No. 615, of the 137th General Assembly pertaining to corporate owned life insurance. The primary purpose of this legislation is to allow for transactions in accordance with Internal Revenue Code Section 1035, policy exchanges between carriers." Thus, the Commissioner believes that 18 Del. C. § 702(c)(2)(b) must be read in accordance with Internal Revenue Code Section 1035 and when reading the statutes together, Sun Life's interpretation of "case" is invalidated. Unfortunately this argument is undermined by the fact that the amendment to § 702 to facilitate like kind exchanges consistent with the IRS code occurred in a different subsection of the statute having no logical connection to the definition change to the word "case." Therefore the Department's argument here is simply that the 1998 amendment created no substantial change to the definition of "case" and the tax structure still only applies to a single private placement.
The Court recognizes that the parties' suggested interpretations of the statute and the legislative intent are reasonable and equally plausible. The Court's own review of the statute reflects that it is also likely and reasonable that the 1998 change is simply a rewrite of the section of the 1994 legislation that is in parenthesis that defined the word "case." In fact, this scenario seems to the Court to be the most likely rationale for why the amendment was made as it gave clarity to what appears in the earlier definition to be an afterthought to an important concept, that is, the ability of small companies to group together in a single placement and reap the same benefits available to larger corporations. Unfortunately this alternative explanation simply highlights the ambiguity of this statute and how it is subject to a multitude of possible interpretations as to the intent of the Legislature in passing the amendment.
The definition in parenthesis stated "or group of employers or individuals that participate in a single private placement under federal security laws."
Under these circumstances, the Court believes its only prudent alternative is to rely upon well-settled Delaware law that issues regarding the breadth of a taxing statute must be construed against the taxing authority and in favor of the taxpayer. As with the case here, both sides have agreed that the statute is ambiguous and that there are many reasonable interpretations as to the intent behind the amendments that were made in 1998. Therefore, based on previous cases dealing with statutory interpretation regarding tax statutes, the Court finds that it must hold in favor of the taxpayer.
Acadia Brandywine Town Ctr., LLC v. New Castle County, 879 A.2d 923, 928 (Del. 2005) (citing Arbern v. Wilmington, Inc. v. Dir. Of Revenue, 596 A.2d 1385, 1388 (Del. 1991)).
The remedy for the Department, if they believe their position is correct, is to seek a legislative fix that will remove this ambiguity and hopefully clearly articulate the reason the definition of "case" in this statute is again being amended. This is the only way the taxpayer will be on reasonable notice of what will be expected and thus allow them to make rational business decisions on the benefits of writing these policies under the laws of this State or elsewhere.
Conclusion
For the foregoing reasons, the Court hereby reverses the Hearing Officer's decision below and finds in favor of Sun Life. IT IS SO ORDERED.
s to "provide and employ such small open row and sail boats, in each district, together with the number of persons to serve in them, as shall be necessary for the use of the surveyors and inspectors in going on board of ships or vessels and otherwise, for the better detection of frauds", but to do so "with the approbation of the Secretary", which we take to constitute an appointment by the Secretary.
Cf.
supra note 24.
Act of March 2, 1799, ch. 22, sees. 97 and 98, 1 Stat. 699.
Id. sec. 99, 1 Stat 700. The preamble to the 1802 Roll, at 261, describes "[t]he officers employed in the collection of the external revenue" as falling into three groups, one of which consisted of, inter alia, "masters and mates of revenue cutters" who are said to have been "appointed by the President".
Id. sec. 101, 1 Stat. 700. The statute also authorized the collectors to hire temporary and occasional inspectors. Id. sees. 14, 19, 38, 53, 1 Stat. 636, 640, 658, 667.
Thus, almost all of the persons employed for external revenue collection under the early statutes either were appointed by the President or the Secretary, or else were temporary (i.e., the deputies, occasional inspectors, and persons "specially appointed"). The only permanent non-appointed positions referenced in the statutes were the "non-commissioned officers, gunners and mariners" for revenue cutters.
Id. sees. 97 and 98. The 1802 Roll does not list "non-commissioned officers, gunners and mariners" but does refer, at 261, to "bargemen employed by collectors". We infer that the 1802 Roll's "bargemen" are these employees named in the statute.
Thus the Department of the Treasury and its external revenue staff were virtually all "appointed". However, the internal revenue personnel (the predecessors of today's 1RS) were treated differently, as we now show.
3. Internal revenue collection
In 1792 Congress established the office of the Commissioner of the Revenue, who was responsible for collection of internal revenue. See supra note 16. In the previous year Congress had already provided that the United States was divided into fourteen districts for the purpose of collecting Federal revenue, both internal and external, and it had authorized for each district "a supervisor" and "inspectors" who were to be appointed by the President with the advice and consent of the Senate. However, that 1791 Act had also provided "[t]hat the supervisor of each district shall appoint proper officers to have the charge and survey of the distilleries within" the district, with no requirement that the Secretary's approval be obtained.
Act of Mar. 3, 1791, ch. 15, sec. 4, 1 Stat. 199.
Id. sec. 18, 1 Stat. 203 (emphasis added); see also Act of June 5, 1794, ch. 48, sec. 3, 1 Stat. 377 (referring to "the several officers of inspection acting under" the supervisors).
A 1794 internal revenue statute that imposed duties on carriages provided for duties to "be levied, collected, received and accounted for, by and under the immediate direction of the supervisors and inspectors of the revenue, and other officers of inspection". A similar act in 1796, also imposing duties on carriages, referred to "officers or persons employed under" the supervisors and inspectors. In 1798 the supervisors were authorized to hire clerks. These "proper officers" (authorized in 1791), "other officers of inspection" (authorized in 1794), "officers or persons employed under" them (referred to in 1796), and clerks (authorized in 1798) were thus not appointed by the President nor by the Head of a Department.
Act of June 5, 1794, ch. 45, sec. 2, 1 Stat. 374.
Act of May 28, 1796, ch. 37, sec. 11, 1 Stat. 481.
Act of July 11, 1798, ch. 71, sec. 2, 1 Stat. 592; see also Act of Apr. 6, 1802, ch. 19, sec. 5, 2 Stat. 150. In 1805 the Secretary was authorized to employ clerks to serve under the direction of the supervisor of the district of South Carolina. See Act of Jan. 30, 1805, ch. 11, sec. 1, 2 Stat. 311.
In July 1798 Congress imposed a direct tax of $2 million, apportioned among the States, to be assessed on "dwelling houses, lands and slaves". In the same month Congress provided for the appointment of additional internal revenue personnel to perform the necessary enumerations and valuations. Act of July 9, 1798 ("An Act to provide for the valuation of Lands and Dwelling-Houses, and the enumeration of Slaves within the United States"), ch. 70, sec. 1, 1 Stat. 580. For revenue purposes Congress subdivided the States into various "divisions", id., and provided that the President would appoint a "commissioner" for each division, id. sec. 3, 1 Stat. 584. (Each of the commissioners was authorized to appoint a clerk, id. sec. 5; and as is noted below, each commissioner was authorized in 1800 to appoint his own "assistant".) The commissioners within the several States were authorized collectively to "divide their respective states into a suitable and convenient number of assessment districts, within each of which they shall appoint one respectable freeholder to be principal assessor, and such number of respectable freeholders to be assistant assessors, as they shall judge necessary for carrying this act into effect". Id. sec. 7 (emphasis added). These assessors and assistant assessors (appointed not by the President or the Secretary but by the Presidentially appointed commissioners) were "to value and enumerate the said dwelling-houses, lands and slaves", id. sec. 8, 1 Stat. 585, in order to establish the tax base against which the tax would be collected. One commentator observed:
Act of July 14, 1798 ("An act to lay and collect a direct tax within the United States"), ch. 75, sees. 1 and 2, 1 Stat. 597, 598. Section 8 of Article I of the Constitution permits Congress "To lay and collect Taxes"; but before the ratification of the 16th Amendment, "No capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken."
The tax on land, dwellings, and slaves (1798) * * * involved a wide area of official discretion. It required a valuation of property * * * for which Congress formulated some general rules that left the assessment largely to the judgment of local assessors — but subject to an administrative review.
Leonard White, The Federalists: A Study in Administrative History, 452 (1948).
For the collection itself, the 1798 Act provided that the supervisors (Presidentially appointed) were "authorized and required to appoint such and so many suitable persons in each assessment district within their respective districts, as may be necessary for collecting the said tax". Act of July 14, 1798, ch. 75, sec. 4, 1 Stat. 599. If a property owner did not pay the tax upon demand, then the "collector" (again, appointed not by the President or the Secretary but by the Presidentially appointed supervisors) could "proceed to collect the said taxes, by distress and sale of the goods, chattels or effects of the persons delinquent". Id. sec. 9, 1 Stat. 600.
The 1802 Roll, at 261, confirms that the "collectors and auxiliary officers [were] appointed by the supervisors".
Another statute from 1798 allowed a property owner who disputed a valuation to appeal the matter to the principal assessor. Act of July 9, 1798, ch. 70, sees. 19 and 20, 1 Stat. 588. (No provision is made for a further appeal to the Presidentially appointed commissioner, but the commissioner did have the power "to revise, adjust and vary the valuations * * * as shall appear to be just and equitable". Id. sec. 22, 1 Stat. 589.) The right of appeal from an assessor's valuation did have an exception: Where a property owner had submitted a property list that a court found to be "false and fraudulent", the assessor was authorized to make a valuation and enumeration "from which there shall be no appeal".
See, to the same effect, Act of Jan. 2, 1800, ch. 3, sec. 1, 2 Stat. 4.
This 1798 Act provided for an additional official appointed neither by the President nor by the Secretary: The supervisors and inspectors (i.e., created in the 1791 and 1794 Acts) were authorized "to depute one skilful and fit person, in each assessment district, to be surveyor of the revenue". Id. sec. 24 (emphasis added). A "surveyor of the revenue" was a position different from the "surveyors" appointed by the President pursuant to the original 1789 Act. The principal duties of the surveyor of the revenue were: (1) to preserve "the records of the lists, valuations and enumerations" made pursuant to the Act; (2) to make appropriate charges and credits when property was sold; (3) to apportion value when property was divided; (4) to value and assess newly built houses; and (5) subject to the approval of the (Presidentially appointed) inspector of the survey, to reduce valuations when property was damaged or destroyed. Id. sec. 25. (In 1800 the surveyor of the revenue was also empowered, when property had been omitted from the lists, to "make a list and valuation thereof".)
See also Act of Jan. 30, 1805, ch. 11, sec. 2, 2 Stat. 312.
Act of May 13, 1800, ch. 60, sec. 1, 2 Stat. 80.
In 1800 the Presidentially appointed commissioners were permitted to hire "such assistants as they shall find necessary, and appoint for that purpose", i.e., for the purpose of completing additions to or reductions of assessments that the commissioner has directed.
Act of Jan. 2, 1800, ch. 3, sec. 2, 2 Stat. 4 (emphasis added). See also, to the same effect, Act of May 10, 1800, ch. 53, sec. 2, 2 Stat. 72.
In sum, the early internal revenue statutes authorized the employment not only of Presidentially appointed supervisors and inspectors but also of the following personnel who were not appointed by the President or the Secretary (and whose positions were not temporary, like the deputies'):
• "proper officers to have the charge and survey of the distilleries", Act of Mar. 3, 1791, ch. 15, sec. 18;
• "officers or persons employed under" the supervisors and inspectors, Act of May 28, 1796, ch. 37, sec. 11;
• "clerks" hired by the supervisors and commissioners, Act of July 11, 1798, ch. 71, sec. 2; Act of Apr. 16, 1802, ch. 19, sec. 5;
• "principal assessors" and "assistant assessors", Act of July 9, 1798, ch. 70, sec. 7;
• "collectors", Act of July 14, 1798, ch. 75, sees. 4, 9;
• "surveyors of the revenue", Act of July 9, 1798, ch. 70, sec. 24; and
• "assistants" to the commissioners, Act of Jan. 2, 1800, ch. 3, sec. 2.
The 1802 Roll, at 280-288, lists 16 supervisors and 24 inspectors, thus totaling 40 Presidentially appointed internal revenue personnel. It also lists 40 clerks, 361 collectors, 34 collectors' clerks, and 102 "Auxiliary officers" (apparently a generic term for the other personnel authorized in the statutes). The "collectors and auxiliary officers, appointed by the supervisors", id. at 261 (emphasis added), are significantly more numerous than the Presidentially appointed supervisors and inspectors.
E. Subsequent appointment of internal revenue personnel
In his first inaugural address, President Thomas Jefferson called for the repeal of the original internal revenue taxes, and that repeal took place in 1802. Thereafter there were four iterations of the internal revenue tax, before the modern regime that is still in place today; and the pattern of appointments that had been set for internal revenue in the late 18th century was followed in those four subsequent internal revenue statutes. That is, non-appointed personnel hired by persons inferior to the Secretary of the Treasury had more than ministerial responsibility in internal revenue statutes enacted during the War of 1812, during the Civil
See Act of Apr. 6, 1802, ch. 19, 2 Stat. 148.
See Lucius A. Buck, "Federal Tax Litigation and the Tax Division of the Department of Justice", 27 Va. L. Rev. 873, 875-877 (1941).
See Act of July 22, 1813, ch. 16, sees. 3, 8, 20-22, 3 Stat. 26, 27, 30, 31 (Assistant Assessors could correct fraudulent property lists without any taxpayer appeal right; Deputy Collectors could seize and sell personal and real property).
War and Reconstruction, after the ratification of the 16th Amendment, and in connection with the first World War.
See Act of Aug. 5, 1861, ch. 45, sees. 11, 34, 51, 12 Stat. 296, 303, 310 (Assistant Assessors are described with less detail; Assistant Collectors could levy upon property and could arrest and imprison taxpayers who refused to testify); Act of July 1, 1862, ch. 119, sees. 3, 5, 9, 12 Stat. 433-435 (Assistant Assessors and Deputy Collectors with powers similar to those in 1813); Act of June 30, 1864, ch. 173, sees. 8, 10, 13, 14, 52, 118, 13 Stat. 224-227, 242, 282 (Assistant Assessors and Deputy Collectors were given powers similar to those in 1862 (but arrest power was replaced with summons authority and power to apply to a judge for arrest for contempt), and both could also administer oaths and take evidence; Assistant Assessor could adjust taxable income upward "if he shall be satisfied" that income was understated, with appeal of any such increase to the assessor); Act of Mar. 3, 1865, ch. 78, 13 Stat. 480 (Assistant Assessor can adjust taxable income upward "if he has reason to believe" that income is understated); Act of July 13, 1866, ch. 184, sees. 4, 9, 14 Stat. 99, 126, (Assistant Assessors could give permits for cigar-making; Deputy Collectors could hold cotton until tax on it had been paid); Act of Mar. 2, 1867, ch. 169, sees. 19, 20, 14 Stat. 482 (any internal revenue officer could be authorized to seize property and could seize barrels if they had reason to believe that taxes on them had not been paid); Act of July 14, 1870, ch. 255, sec. 36, 16 Stat. 271 (weighers, gaugers, measurers, and inspectors).
See Act of Oct. 3, 1913, ch. 16, 38 Stat. 169, 179 (a Deputy Collector could demand that a taxpayer show cause why the income amount on the return should not be increased and, if no return or a false or fraudulent return had been provided, could make a return based on the best information he could obtain, which return was then to be held prima facie good and sufficient for all legal purposes).
See Act of Sept. 8, 1916, ch. 463, sees. 16-22, 39 Stat. 774-776 (Deputy Collector had powers similar to those in 1913); Act of Feb. 24, 1919, ch. 18, sec. 1317, 40 Stat. 1146-1148 (Deputy Collector had powers similar to those in 1913 and 1916, and could administer oaths and take evidence).
The pattern set in the late 18th century persists today: The general authority of the Secretary of the Treasury is described in 31 U.S.C., sec. 321 (2006), and it does not include employment or appointment of internal revenue personnel. "The Secretary of the Treasury is authorized to appoint * * * such attorneys and other officers and employees as he may deem necessary" in the Customs Service for external revenue collection, 19 U.S.C., sec. 2072(a) (2006); but the Secretary does not generally make appointments for internal revenue collection. Rather, "the Commissioner of Internal Revenue is authorized to employ such number of persons as the Commissioner deems proper for the administration and enforcement of the internal revenue laws". Sec. 7804(a).
II. The Internal Revenue Service Office of Appeals
A. The legal basis for the Office of Appeals
The Office of Appeals is a component of the 1RS within the Department of the Treasury. The Office of Appeals was not created by the CDP provisions at issue here (i.e., sections 6320 and 6330), which were added to the Internal Revenue Code in 1998, nor by the several other provisions of the Code that mention the Office of Appeals. Rather, all these statutory provisions presume its prior existence. In its current form the Office of Appeals exists pursuant to section 7804(a), which provides:
See sees. 6015(c)(4)(B)(h)(I) (innocent spouse relief), 6603(d)(3)(B) (deposits), 6621(c)(2)(A)(i) (interest rates), 7122(e)(2) (taxpayer appeal of denial of offer-in-compromise), 7123 (Appeals dispute resolution procedures), 7430(c)(2), (c)(7), (g)(2) (reasonable administrative and litigation costs), 7522(b)(3) (content of letter of proposed deficiency), 7612(c)(2)(A) (protection of confidential information on taxpayer software). Mr. Tucker describes section 7122(e) as if it provides for a "right to appeal * * * to an Appeals Officer", but the statute mentions no officer.
SEC. 7804. OTHER PERSONNEL.
(a) APPOINTMENT AND SUPERVISION. — Unless otherwise prescribed by the Secretary, the Commissioner of Internal Revenue is authorized to employ such number of persons as the Commissioner deems proper for the administration and enforcement of the internal revenue laws, and the Commissioner shall issue all necessary directions, instructions, orders, and rules applicable to such persons.
Congress thus provided that, except as the Secretary otherwise prescribes, it is the Commissioner and not the Secretary who shall "employ" (not "appoint") other personnel in the Internal Revenue Service. Pursuant to this congressional mandate, the Commissioner established the Office of Appeals and employed personnel to staff that office. The stated mission of the Office of Appeals is to resolve tax controversies without litigation. This mission as well as the operating directives and guidelines of the Office of Appeals are set forth in the Internal Revenue Manual (IRM).
One exception to this general rule is present in 5 U.S.C., sec. 9503(a) (2006), which authorizes the Secretary of the Treasury to appoint up to 40 individuals to critical administrative, technical, and professional positions in the 1RS before July 23, 2013, provided that such individuals were not 1RS employees before June 1, 1998, and that their appointments are limited to no more than 4 years.
According to the Internal Revenue Manual (IRM), "The Appeals Mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service." IRM pt. 8.1.1.1(1) (Oct. 23, 2007).
B. A brief history of the Office of Appeals
The first precursor to the Office of Appeals was established by statute — i.e., by the Revenue Act of 1918, ch. 18, 40 Stat. 1057. Then known as the Advisory Tax Board, it had the authority only to offer its recommendation on cases submitted to it by the Commissioner. The Advisory Tax Board was soon replaced by the Committee on Appeals and Review, which was given the authority to hear administrative appeals from taxpayers and redetermine their deficiencies pursuant to the Revenue Act of 1921, ch. 36, 42 Stat. 227. The name and structure of the appeals function of the 1RS has changed several times since then, but its mission to resolve tax controversies without litigation has remained the same. See 1RS Document 7225, History of Appeals, 60th Anniversary Edition 3-6 (Nov. 1987).
The Committee on Appeals and Review was abolished on June 2, 1924, in favor of creating the Board of Tax Appeals because it was thought that a judicial tribunal would better serve taxpayers. 1RS Document 7225, History of Appeals, 60th Anniversary Edition 3 (Nov. 1987). However, in response to the rapidly growing docket of the Board of Tax Appeals, the Special Advisory Committee was formed as a part of the Commissioner's office to reprise the role of the Committee on Appeals and Review. Id. This Court is the successor to the (statutory) Board of Tax Appeals, and the Office of Appeals is the successor to the Special Advisory Committee. See id.
However, in the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub.L. 105-206, 112 Stat. 685, Congress enacted provisions that directly addressed the appeals function. One of the four required features of the plan of reorganization that the 1RS was to undertake was that it "ensure an independent appeals function within the Internal Revenue Service". Id. sec. 1001(a)(4), 112 Stat. 689. Explicit reference to the Office of Appeals was added to the Code not only in the new CDP procedures in sections 6320 and 6330 but also in sections 6015(c)(4)(B)(ii)(I), 7122(d)(2) (now designated (e)(2)), 7123, 7430(c)(2) and (g)(2)(A), and 7612(c)(2)(A).
C. " Appeals Officers" in the Office of Appeals
1. The Pre-CDPRole of the "Appeals Officer"
The position of "Appeals Officer" has existed within the Office of Appeals since 1978. IRS Document 7225, supra at 3-5. Mr. Tucker does not argue that any Office of Appeals' personnel were "inferior Officers" before the passage of the RRA, but he asserts that as a result of the RRA those positions possessed authority that may be consitutionally exercised only by an "officer of the United States".
The position of "Appeals Officer" — as well as earlier positions within the Office of Appeals and its predecessors — had the authority to make deficiency determinations and hear collection-related appeals long before the passage of the RRA, which enacted the CDP regime. The appeals function had the authority to redetermine deficiencies since 1921. IRS Document 7225, supra at 3. And it had the authority to hear collection-related appeals under the collection appeals program (CAP) since 1996. IRM pt. 8.24.1.1.1 (May 27, 2004).
Today both CAP and the CDP regime (discussed below) are administered by the Office of Appeals. IRM pt. 8.24.1.1.1 (May 27, 2004). As a result, a taxpayer may be eligible to request either a CAP or CDP hearing with respect to a lien or levy. Id. However, taxpayers are eligible for CAP hearings in more circumstances than CDP hearings. Publication 1660, Collection Appeal Rights 3 (rev. 03-2007). For example, a taxpayer is eligible for a CAP hearing when a CDP hearing is unavailable because the taxpayer already had a CDP hearing or failed to timely request such a hearing. IRM pt. 8.24.1.1.1(6) (May 27, 2004).
"CAP is an administrative review program not required by statute." Offiler v. Commissioner, 114 T.C. 492, 494 (2000). In 1996 the 1RS created CAP to provide taxpayers with the right to appeal lien, levy, and seizure actions. IRM pt. 8.24.1.1.1(1) (May 27, 2004). In 1997 CAP was expanded to implement the Taxpayer Bill of Rights 2, Pub.L. 104-168, 110 Stat. 1457 (1996), in order to provide taxpayers with the right to appeal the proposed termination of installment agreements, IRM pt. 8.24.1.1.1(2) (May 27, 2004); see also sec. 7122(e)(2). Although Congress did not codify CAP, the legislative history of the RRA shows that Congress was aware of CAP when it enacted the CDP regime (discussed below). See S. Rept. 105-174, at 92 (1998), 1998-3 C.B. 537, 628.
2. " Collection Due Process" procedures added to the Code in 1998
If a taxpayer fails to pay any Federal income tax liability after notice and demand, chapter 64 of the Code provides two means by which the 1RS can collect the tax: First, section 6321 imposes a lien in favor of the United States on all the property of the delinquent taxpayer, and section 6323(f) authorizes the 1RS to file notice of that lien; second, section 6331(a) authorizes the 1RS to collect the tax by levy on the taxpayer's property.
Although this case involves only an Office of Appeals determination to sustain a notice of lien and not a determination to proceed with a levy, the function of the "appeals officer" that pertains to levies should be considered in determining the nature of that position. Cf. Freytag v. Commissioner, 501 U.S. at 882 ("The fact that an inferior officer on occasion performs duties that may be performed by an employee not subject to the Appointments Clause does not transform his status under the Constitution. If a special trial judge is an inferior officer for purposes of * * * [some of his duties], he is an inferior officer within the meaning of the Appointments Clause and he must be properly appointed").
However, in 1998 Congress added to chapter 64 of the Code certain provisions (in subchapter C, part I, and in sub chapter D, part I) as "Due Process for Liens" and "Due Process for Collections". The 1RS must comply with those provisions after filing a tax lien and before proceeding with a levy. Explicit mention of "appeals officers" was introduced by the RRA into these CDP provisions. In the following brief description of those CDP procedures, we emphasize phrases from the statute that are important to the later analysis in this Opinion.
The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA), Pub.L. 105-206, 112 Stat. 685, also included three references to "appeals officers" that are not codified in the Internal Revenue Code. RRA section 3465(b), 112 Stat. 768, 1998-3 C.B. 228, provides: "The Commissioner of Internal Revenue shall ensure that an appeals officer is regularly available within each State"; RRA section 1001(a)(4), 112 Stat. 689, 1998-3 C.B. 149, provides that the reorganization plan should prohibit "ex parte communications between appeals officers and other Internal Revenue Service employees"; and RRA section 3465(c), 112 Stat. 768, 1998-3 C.B. 228, provides that the 1RS should "consider the use of the videoconferencing of appeals conferences between appeals officers and taxpayers seeking appeals in rural or remote areas." (Emphasis added.)
Within five business days after filing a tax lien, the 1RS must provide written notice of that filing to the taxpayer. Sec. 6320(a). After receiving such a notice, the taxpayer may request an administrative hearing to "be held by the Internal Revenue Service Office of Appeals." Sec. 6320(b)(1) (emphasis added). Similarly, before proceeding with a levy, the 1RS must issue a final notice of intent to levy and must notify the taxpayer of the right to an administrative hearing to "be held by the Internal Revenue Service Office of Appeals." Sec. 6330(a) and (b)(1) (emphasis added). Section 6330(b)(3), entitled "Impartial officer" (emphasis added), provides that "[t]he hearing under this subsection shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax" at issue (emphasis added).
To the extent practicable, a CDP hearing concerning a lien under section 6320 is to be held in conjunction with a CDP hearing concerning a levy under section 6330, and the conduct of the lien hearing is to be in accordance with the relevant provisions of section 6330. See sec. 6320(b)(4), (c).
The pertinent procedures for the agency-level CDP hearing are set forth in section 6330(c). First, the statute provides, "The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met." Sec. 6330(c)(1) (emphasis added). Second, the taxpayer may "raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy," including challenges to the appropriateness of the collection action and offers of collection alternatives. Sec. 6330(c)(2)(A). Additionally, the taxpayer may contest the existence and amount of the underlying tax liability, but only if he did not receive a notice of deficiency or otherwise have an opportunity to dispute the tax liability. Sec. 6330(c)(2)(B). Section 6330(c)(3) then provides, "The determination by an appeals officer under this subsection shall take into consideration" (emphasis added) — (1) the verification that he obtained, (2) the issues raised by the taxpayer, and (3) a balancing of the need for efficient tax collection with concerns that the collection be no more intrusive than necessary.
Mr. Tucker did not challenge his underlying liabilities (which were, in fact, the liabilities that he himself had reported on his late returns). However, as we observed supra note 51, in order to determine the nature of the "appeals officer" position, we should consider all of its functions, not only those that were operative in this case.
The authority to conduct CDP hearings and make determinations under sections 6320 and 6330 has been delegated to three positions within the Office of Appeals: (i) "Appeals Officers", (ii) "Settlement Officers", and (iii) "Appeals Account Resolution Specialists". Appeals Delegation Order 8-a, IRM Exhibit 8.22.2-4 (Nov. 1, 2006). The authority to review and approve those determinations is delegated to team managers. Id. Today, in practice, settlement officers conduct CDP hearings and make an initial determination that is subsequently approved or overruled by a team manager, who makes the final determination on behalf of the Office of Appeals.
Mr. Tucker complains that "AARS is a fancy title for an even lower pay grade person who the 1RS used to call a `screener`" and that AARSs are "now holding CDP hearings in certain low-dollar situations". However, no CDP determination is issued until it has been reviewed and approved by a higher ranking team manager. If the Office of Appeals were to assign CDP hearings to employees untrained in or incapable of the task, their inadequate performance would be subject to review by this Court.
If the taxpayer is not satisfied with the determination he receives from the Office of Appeals, the taxpayer may "appeal such determination to the Tax Court". Sec. 6330(d)(1). Where challenges to the underlying liability are at issue (under section 6330(c)(2)(B)), the Tax Court reviews the determination de novo. Davis v. Commissioner, 115 T.C. 35, 39 (2000). For other disputes, the Tax Court reviews the determination for abuse of discretion, Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 182 (2000) — that is, to determine whether the determination was arbitrary, capricious, or without sound basis in fact or law, see Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd. 469 F.3d 27 (1st Cir. 2006).
Congress enacted these procedures in order to grant taxpayers "protections in dealing with the 1RS that are similar to those they would have in dealing with any other creditor", that is, in order to "afford taxpayers adequate notice of collection activity and a meaningful hearing before the 1RS deprives them of their property." S. Rept. 105-174, supra at 67, 1998-3 C.B. at 603. It is fair to say that the officer or employee who conducts the CDP hearing is performing a critical role in an important tax proceeding.
3. Post-CDP hearing procedures
However, because the "finality" of an Office of Appeals determination is relevant to the appeals officer's status as an "officer" under the Appointments Clause, it is pertinent to note the circumstances in which the 1RS may face again the same taxpayer whose collection issues and underlying liability have been previously considered by the Office of Appeals in a CDP hearing, and to discern the extent, if any, to which the 1RS will be bound to the determination made in the CDP context — either a determination on a liability issue (whether the tax is owed) or determination on a collection issue (whether and how the tax will be collected).
a. Collection issues
If the CDP officer or employee enters into an installment agreement under section 6159, a closing agreement under section 7121, or an OIC under section 7122 with the taxpayer, then of course the agency will be bound under general contract principles to honor the agreement. However the agency is also bound to honor such agreements that it enters into outside of the CDP context, whether by the Office of Appeals or by another branch of the 1RS. Consequently, the authority to enter into such agreements on behalf of the 1RS is not peculiar to an officer or employee conducting a CDP hearing.
In addition, if an agreement embodied in Form 870-AD, "Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment", is accepted by the 1RS and executed with the taxpayer, equitable estoppel may apply to make that agreement binding on all functions of the 1RS. See Kretchmar v. United States, 9 CI. Ct. 191, 198 (1985).
However, the CDP hearing may yield a determination by the Office of Appeals that is not embodied in one of those agreements, such as a determination that the taxpayer should be put in "currently not collectible" (CNC) status, see IRM pt. 8.22.2.4 (Mar. 11, 2009), 8.23.3.13 (Aug. 28, 2009), or that a lien should be released or subordinated, see sec. 6325; IRM pt. 8.22.3.9.6.1 (Apr. 8, 2009), 8.22.3.9.6.2 (Oct. 19, 2007), 8.22.2.4.6 (Dec. 1, 2006), or that a levy should be released, see sec. 6343; IRM pt. 8.22.3.9.5 (Apr. 8, 2009). We find no authority addressing any binding character of these determinations, but we assume that their force is enhanced by section 6330(d)(2), which provides:
(2) JURISDICTION RETAINED AT 1RS OFFICE OF APPEALS. — The Internal Revenue Service Office of Appeals shall retain jurisdiction with respect to any determination made under this section, including subsequent hearings requested by the person who requested the original hearing on issues regarding —
(A) collection actions taken or proposed with respect to such determination; and
(B) after the person has exhausted all administrative remedies, a change in circumstances with respect to such person which affects such determination.
That is, we assume that the retention of "jurisdiction" by the Office of Appeals "with respect to any determination" would bar 1RS collection personnel from contradicting Appeals' collection determination. If collection personnel undertook collection action in violation of Appeals' determination, then that action could be halted by Appeals in a retained jurisdiction hearing. Even so, the sense in which Appeals' collection determination can be said to be binding is qualified in several significant respects:
First, section 6330(d)(2) would bind only non-Appeals functions. The Office of Appeals itself, if it "retains jurisdiction", must retain jurisdiction to modify its determination.
Second, if the Office of Appeals sustains the notice of lien or intent to levy, there are circumstances in which the 1RS thereafter may forgo collection or make accommodations nonetheless. Collection personnel may perform the investigation required by section 633 1(j) and decide not to proceed with a levy against specific property. Collection personnel retain the power to withdraw a notice of lien pursuant to sections 6323(j), to release a lien pursuant to section 6325, and to release a levy pursuant to section 6343. The taxpayer is always free to submit to 1RS collection personnel another proposal of an installment agreement or an OIC, and those personnel have authority to accept that new proposal notwithstanding the Office of Appeals' rejection of the taxpayer's prior proposal. See IRM pt. 1.2.44.2.
If the taxpayer challenges the validity of a lien in an action to quiet title under 28 U.S.C. sec. 2410 in Federal District Court, the Government will be represented not by the 1RS attorneys in the Office of Chief Counsel but by the Department of Justice, pursuant to 28 U.S.C. sec. 516. If the Department of Justice concludes that the lien is not valid, then there is no apparent basis for arguing that the Government is bound by the Office of Appeals' contrary determination sustaining the lien.
See also H. Conf. Rept. 105-599, at 289 (1998), 1998-3 C.B. 747, 1020 ("A taxpayer could apply for consideration of new information, make an offer-in-compromise, request an installment agreement, or raise other considerations at any time before, during, or after the Notice of Intent to Levy hearing").
Third, on the other hand, if the Office of Appeals determined not to sustain the notice of lien or of proposed levy that was challenged in a CDP hearing, 1RS collection personnel would be free to issue another notice of lien or intent to levy, as long as the period of limitations for collection, see sec. 6502, remained open. The subject matter of a CDP hearing is the particular notice of lien or intent to levy that the taxpayer challenged under section 6320(a)(3)(B) or 6330(a)(3)(B).
Fourth, the National Taxpayer Advocate or her delegate can issue a Taxpayer Assistance Order (TAO) requiring the 1RS to "release property of the taxpayer levied upon" or to "cease any action, take any action as permitted by law, or refrain from taking any action" with respect to its collection activities. See sec. 7811(b); 26 C.F.R. sec. 301.7811-1(c), Proced. Admin. Regs.; see also IRM pt. 13.1.20.3(1) (Dec. 15, 2007) ("A TAO may be issued for either of two purposes: A. To direct the OD/Function [to] take a specific action, cease a specific action, or refrain from taking a specific action; or B. To direct the 1RS to review at a higher level, expedite consideration of, or reconsider a taxpayer's case").
Fifth, by its nature a collection determination could be binding only until there has been a change in the taxpayer's circumstances. The collection issues that the officer or employee may address in the agency-level CDP hearing involve the financial circumstances of the taxpayer that, by their nature, may change after the hearing. See sec. 6330(d)(2)(B); 26 C.F.R. sec. 301.6330-1(e)(1), Proced. Admin. Regs.; Rev. Proc. 2003-71, sec. 4.03, 2003-2 C.B. 517, 518. To decide whether the 1RS ought to proceed with collection, the officer or employee is instructed by agency regulations to request and obtain detailed financial information about the taxpayer during the hearing, and to make a determination on the basis of that information. See 26 C.F.R. sec. 301.6330-1(e)(1), Proced. Admin. Regs. ("Taxpayers will be expected to provide all relevant information requested by Appeals, including financial statements, for its consideration of the facts and issues involved in the hearing"). However, if and when a taxpayer later becomes ill or loses a job, or when a previously ill or unemployed taxpayer is healed or gets a job, then the position of the tax collector may well change. This reality is reflected explicitly in section 6330(d)(2)(B), which contemplates "a change in circumstances with respect to such person which affects such determination." Thus, an appeals officer's collection judgments reflected in a notice of determination issued after a CDP hearing are not necessarily the last word, even for the Office of Appeals itself — nor should they be. Instead, the Office of Appeals retains jurisdiction to continue to consider collection issues over time. This flexibility helps to ensure that, on a continuing basis, the 1RS will tailor its collection activities to the taxpayer's current circumstances and that the 1RS will not take collection action that is arbitrary or which creates unnecessary hardship for the taxpayer.
Sixth, if the taxpayer appeals an adverse determination to the Tax Court, then, as we have noted in part U.C.2 above, the appeals officer's collection decisions are reviewed in litigation. In that context, the determination is of course not binding on the Tax Court, which reviews for abuse of discretion. More important for evaluating "finality", however, is the fact that even the 1RS as a litigant is not bound by the position in the Office of Appeals' notice of determination. In defending against that CDP appeal, the 1RS (acting through its attorneys under the Chief Counsel) may re-think the appeals officer's collection decisions and may take a position — in the litigation or in the settlement of it — that is different from the position reflected in the Office of Appeals's CDP determination. See 26 C.F.R. sec. 601.106(a)(1)(i), (d), Statement of Procedural Rules; Rev. Proc. 87-24, 1987-1 C.B. 720; General Counsel Order No. 4. (Jan. 19, 2001). It is the experience of this Court that the Office of Chief Counsel sometimes does not defend the Office of Appeals' determination but rather admits an abuse of discretion and moves the Court to remand the case to the Office of Appeals for a supplemental CDP hearing. In those instances the agency's position (as taken by Chief Counsel) contradicts the notice of determination, to which the agency is manifestly not bound.
Consequently, the CDP determination of the Office of Appeals is not necessarily the agency's last word on collection issues.
b. Underlying liability
As we noted above in part U.C.2, a taxpayer who did not have a previous opportunity to dispute the amount of his underlying tax liability may raise such a dispute in the agency-level CDP hearing, pursuant to section 6330(c)(2)(B). In such a circumstance, the officer or employee conducting the hearing for the Office of Appeals will determine the IRS's position on that taxpayer's liability. Respondent explains that, in practice, a settlement officer will conduct the CDP hearing and will refer the case to an appeals officer to consider the issue of underlying liability. When the appeals officer makes a determination with respect to the liability issue, the case is returned to the settlement officer, who addresses any collection issues and makes an initial determination that is subsequently approved or overruled by a team manager, who makes the final determination on behalf of the Office of Appeals. The settlement officer will not reconsider the appeals officer's determination with respect to the liability issue, and generally, neither will anyone else within the Office of Appeals.
We noted in Lewis v. Commissioner, 128 T.C. 48, 59 (2007) (quoting 26 C.F.R. sec. 601.106(a)(1)(ii), Statement of Procedural Rules), that "[t]he Appeals officer has the `exclusive and final authority' to determine the liability." On the other hand, it is clear that such determinations are not absolutely "final". See Jackson v. Commissioner, T.C. Memo. 1988-143 ("Determinations by the Commissioner are not judicial in nature, but rather are administrative determinations, and are not res judicata to bind him for subsequent years, or for that matter, the same taxable year"); IB J. Moore, Moore's Federal Practice, par. 0.422[2], at 3403 (2d ed. 1974) ("It is axiomatic to the doctrines of res judicata and collateral estoppel that only judicial decisions are given conclusive force in subsequent legal proceedings. Thus determinations made by the Commissioner of Internal Revenue are not judicial in nature but administrative and are not res judicata to bind him for the same taxable year or for subsequent years"). We must therefore discern the sense in which the CDP determination of underlying liability may be said to be "final".
This provision in the regulations does not actually create "exclusive and final authority" but rather presumes such authority on the part of "the regional commissioner" and then provides that Appeals personnel "represent" the regional commissioner in that authority. It is a provision generally applicable when the Office of Appeals has jurisdiction over a determination of liability. It does apply when underlying liability is properly at issue in the CDP context, but its most frequent application must be in the non-CDP cases that come to the Office of Appeals for a deficiency determination. If the delegated authority to make the IRS's "exclusive and final" determination of a taxpayer's liability caused the Office of Appeals personnel to be "inferior Officers", then it would pose questions about the necessity of appointing even the Appeals personnel who handle non-CDP matters and the regional commissioners who possess this authority in the first instance and from whom the Office of Appeals receives this authority only derivatively.
i. If the liability determination is favorable to the taxpayer
If the liability determination made by the Office of Appeals in the CDP context is favorable to the taxpayer, then the CDP process generally ends with a unilateral agency determination not to proceed with collection. Although the team manager in charge of the case has the authority to execute a closing agreement with the taxpayer under section 7121, see 1RS Deleg. Order 97 (Rev. 34), IRM pt. 1.2.47.6 (Aug. 18, 1997), generally no closing agreement is executed, and no litigation ensues. Respondent states that, as with a liability determination in a notice of deficiency, "an underlying liability determination in a CDP case is also binding on the Examination function. The Examination function generally has no opportunity to review Appeals' determination"; and we assume arguendo that this is correct. However, this binding character is limited.
If a taxpayer in a CDP hearing proposes not a complete concession by the 1RS but an offerin-compromise (OIC) based on doubt as to liability, and if the Office of Appeals accepts the OIC, then the resulting agreement is binding on the 1RS. However, that binding effect is not unique to the CDP process; rather, the OIC accepted in the CDP context has the same effect (no more, and no less) as an OIC accepted in any context. In the absence of an OIC or a closing agreement, the non-liability determination is simply reflected in the notice of determination, see IRM pt. 8.22.3.9(1) (Oct. 19, 2007) ("Abatement of Tax"), and then is effectuated either by Office of Appeals personnel directly, see IRM pt. 8.22.3.9.3.1 (Oct. 19, 2007) ("APS [Appeals Processing Services] will input adjustments to tax"), 8.22.3.9.3.1.1(2) (Oct. 19, 2007) ("APS will abate the SFR/ASFR assessment and reverse withholding as requested by the hearing officer"), or by collection personnel, see IRM pt. 5.1.9.3.10(6) (Dec. 15, 2003), 5.19.8.4.9(2) (Nov. 1, 2007), 5.19.8.4.14(1) (Nov. 1, 2007) ("CDP "back-end' work").
It is not clear why Examination would necessarily be bound by the CDP determination of a liability issue. A liability determination in a notice of deficiency (whether issued by the Office of Appeals or another 1RS function) may acquire a quasi-binding character within the agency because section 6212(c) restricts the determination of further deficiencies (though section 6214(a) permits an increased deficiency if the matter is challenged in the Tax Court); but the CDP determination may arise in the absence of a notice of deficiency (as when a taxpayer disputes tax assessed pursuant to his own return) and does not result in the issuance of a notice of deficiency — so that section 6212(c) is not implicated. Amicus observes that the point has not been litigated but concludes that the liability determination in a CDP hearing is probably not binding elsewhere, citing Botany Worsted Mills v. United States, 278 U.S. 282, 289 (1929).
First, if it is true (as section 6330(d)(2) provides) that the Office of Appeals "shall retain jurisdiction with respect to any determination" (emphasis added), then it would seem that the Office of Appeals itself must have jurisdiction to reconsider its pro-taxpayer liability determination.
Second, if the taxpayer had paid all or part of the liability that had been at issue in a CDP hearing and thereafter sought a refund of it through litigation, no collateral estoppel or res judicata effect to govern the outcome of the refund suit would arise from the prior CDP determination. See Jackson v. Commissioner, supra. The case would be defended not by the 1RS but by attorneys of the Department of Justice, see 28 U.S.C., sec. 516 (2006), which also has settlement authority in such cases, see sec. 7122. But even in refund suits handled by the Department of Justice the 1RS must request any counterclaim, see sec. 7403, must give a defense recommendation, see 28 U.S.C., sec. 520 (2006), and must give its views on proposed settlements. In that context, it is the Office of Chief Counsel, and not the Office of Appeals, that speaks for the 1RS; and Chief Counsel is not bound by the appeals officer's CDP determination. IRM pt. 34.8.2.11.5(4) (Aug. 11, 2004). The Government might therefore resist the refund claim — and might even plead a counterclaim — by asserting liabilities that the Office of Appeals did not sustain, taking its cue not from the Office of Appeals but from the Office of Chief Counsel, which must be independent and impartial.
By regulation, 28 C.F.R. sec. 0.15 (2007), it is the Deputy Attorney General (not one of the "Heads of Departments", in Appointments Clause parlance) who hires Department of Justice trial attorneys.
An Assistant Attorney General heads the Tax Division and hires the Chiefs of the litigating sections in the Tax Division. See Memorandum of Dec. 29, 1999, to Heads of Department Components from then-Deputy Attorney General Eric Holder, available at http://www.usdoj.gov/jmd/ps/sesdelegmemo.htm. Settlement authority is delegated to those Chiefs. See Tax Division Directive No. 135, reprinted in 28 C.F.R. pt. O, subpt. Y, app.
See id. (delegating settlement authority only in cases in which the agency agrees, and thereby requiring solicitation of 1RS views to settle tax cases); see also "Department of Justice Tax Division Settlement Reference Manual", at 5-6, 16, available at http://www.usdoj.gov/tax/readingroom/foia/tax.htm.
See IRM pt. 1.1.6.1 (July 29, 2005) ("Counsel must interpret the law with complete impartiality so that the American * * * [public] will have confidence that the tax law is being applied with integrity and fairness.").
Thus, a pro-taxpayer CDP determination on underlying liability has at most a limited "finality" within the agency.
ii. If the liability determination is not favorable to the taxpayer
If the liability determination made by the Office of Appeals in the CDP context is not favorable to the taxpayer, then there are several contexts in which the 1RS may take a position different from that reflected in the CDP determination.
(A). CDP litigation
The taxpayer may appeal the adverse CDP liability determination to the Tax Court, pursuant to section 6330(d). If the taxpayer does appeal, then the Tax Court reviews the liability issues de novo. Davis v. Commissioner, 115 T.C. at 39. In Tax Court proceedings the 1RS is represented by the Office of Chief Counsel, see sec. 7452, which may re-think the liability issues and may take a position different from that reflected in the notice of determination. See IRM pt. 1.1.6.1 (quoted supra note 65). In addition, the Office of Chief Counsel — not the Office of Appeals — has the authority to settle CDP cases that reach litigation, see sec. 601.106(a)(2)(i), Statement of Procedural Rules; Rev. Proc. 87-24, 1987-1 C.B. 720, and it has the authority to settle CDP cases without the concurrence of the Office of Appeals, see Rev. Proc. 87-24, supra; IRM pt. 35.5.1.4.3(2), 35.5.2.7(2), 35.5.2.14(2)(B) (Aug. 11, 2004).
If the taxpayer who receives an adverse notice of determination reflecting the officer's or employee's decision about underlying liability decides not to appeal to the Tax Court, then the 1RS may nonetheless meet this taxpayer again in a variety of other circumstances in which, again, the CDP liability determination will not be binding on the 1RS:
(B). Audit reconsideration
Audit reconsideration is a substantive review of the taxpayer's liability that may result in the abatement of an assessed tax liability. Specifically, audit reconsideration "is the process the 1RS uses to reevaluate the results of a prior audit where additional tax was assessed and remains unpaid, or a tax credit was reversed." IRM pt. 4.13.1.2 (Oct. 1, 2006). The IRS'S authority to conduct an audit reconsideration is grounded in section 6404(a), which provides that "[t]he Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which — (1) is excessive in amount, or (2) is assessed after the expiration of the period of limitations properly applicable thereto, or (3) is erroneously or illegally assessed."
Audit reconsideration is not precluded by a prior CDP determination. See IRM pt. 4.13.1.8 (Oct. 1, 2006) (listing circumstances in which "a request for [audit] reconsideration will not be considered"; prior CDP hearing is not listed). Therefore, a taxpayer who has received an adverse CDP determination with respect to his underlying liability could nonetheless have his liability redetermined in the course of an audit reconsideration.
(C). District Court collection suit
If the taxpayer does not pay the tax, the 1RS may request the Department of Justice to file a collection suit against the taxpayer in Federal District Court. See sec. 7403(a) ("the Attorney General * * *, at the request of the Secretary, may direct a civil action to be filed in a district court"). It is the Office of Chief Counsel, and not the Office of Appeals, that decides for the 1RS whether to make that request, and the Chief Counsel is not bound by the appeals officer's CDP determination of liability. See General Counsel Order No. 4 (rev. Jan. 19, 2001).
(D). Request for abatement, refund claim, and refund litigation
The taxpayer may request an abatement of tax, or he may pay the tax and claim a refund. We are aware of no reason or rule requiring that, when the 1RS then considers administratively that request for abatement or claim for refund, it is bound by the appeals officer's adverse CDP determination. If the 1RS denies a refund claim, the taxpayer may file a refund suit in Federal District Court or the Court of Federal Claims. As we noted above, the 1RS will be asked for its defense recommendation and for its views on proposed settlements. In that context, it will be the Office of Chief Counsel, and not the Office of Appeals, that will speak for the 1RS, and the Chief Counsel will not be bound by the appeals officer's CDP determination. See supra part II.C.3.b.i.
In sum, the collection and liability determinations made in CDP hearings by officers and employees of the Office of Appeals are an important aspect of the agency's administration of the tax law, and they affect to a greater or lesser extent the agency's ultimate position with regard to the tax liability and the collection of it. But there are numerous circumstances in which those determinations may not be the IRS'S last word.
4. The tax administration context of the CDP "officer or employee"
The 1RS personnel who are appointed by the President or the Secretary of the Treasury are the Commissioner, see sec. 7803(a)(1), the Chief Counsel, see sec. 7803(b)(1), members of the Internal Revenue Service Oversight Board, see sec. 7802(b)(1), and the National Taxpayer Advocate, see sec. 7803(c)(1). See also supra note 47. Personnel to fill other positions in the 1RS are hired by the Commissioner pursuant to section 7804(a).
These hired, non-appointed positions include (i) the Deputy Commissioner for Services and Enforcement, who is delegated the authority to oversee the four primary operating divisions of the 1RS, see IRM pt. 1.1.5.3 (Oct. 28, 2008); (ii) the Deputy Commissioner for Operations Support, who is delegated the authority to oversee the integrated support functions of the 1RS, see IRM pt. 1.1.5.4 (Oct. 28, 2008); (iii) the Commissioners of the Wage and Investment Division, the Small Business/Self-Employed Division, the Tax-Exempt and Government Entities Division, and the Large and Mid-Size Business Division, who are delegated the authority to supervise and manage those divisions, see IRM pt. 1.1.13.1 (Sept. 1, 2005), 1.1.16.1 (Mar. 1, 2007), 1.1.23.2 (Feb. 1, 2007), 1.1.24.1 (Nov. 1, 2006); (iv) the Deputy Chief Counsel (Technical), who serves as the principal deputy to the Chief Counsel, acts as Chief Counsel when that office is vacant, maintains jurisdiction over legal issues arising in published guidance, letter rulings, technical advice, and other processes, and participates in the interpretation and development of internal revenue laws, see IRM pt. 1.1.6.2 (Dec. 16, 2009), (v) the Deputy Chief Counsel (Operations), who maintains jurisdiction over issues arising in litigation nationwide and participates in the formulation of tax litigation policy, see IRM pt. 1.1.6.3 (Dec. 16, 2009), and (vi) the Chief of the Office of Appeals, who is delegated the authority to plan, manage, direct, and execute the nationwide activities of that office, see IRM pt. 1.1.7.1 (Feb. 5, 2008).
Justice Breyer would evidently characterize many of these personnel as "officers". See Free Enter. Fund v. PCAOB, 561 U.S. at 130 S. Ct. at 3180 (Breyer, J., dissenting) ("by virtually any definition, essentially all SES [Senior Executive Service] officials qualify as `inferior officers,' for their duties, as defined by statute, require them to `direc[t] the work of aft organizational unit,' carry out high-level managerial functions, or ` otherwise exercis[e] important policy-making, policy-determining, or other executive functions.' § 3132(a)(2) (emphasis added)").
Lower in the 1RS hierarchy, these hired positions include revenue officers (at or above the rank of GS-9), who are delegated the authority (i) to issue, serve, and enforce summonses, to set the time and place for appearance, to take testimony under oath of the person summoned, and to receive and examine data produced in compliance with the summons, see 1RS Deleg. Order 25-1 (formerly 1RS Deleg. Order 4 (Rev. 23), 55 Fed. Reg. 7626); (ii) to issue notices of levy, see 1RS Deleg. Order 5-3 (Rev. 1), IRM pt. 1.2.44.3 (Nov. 8, 2007); and (iii) to issue notices of Federal tax lien, see Delegation Order 5-4 (Rev. 1), IRM pt. 1.2.44.4 (Sept. 23, 2005). That is, revenue officers have the power — unless the CDP process intervenes — to effect the actual collection of tax.
The General Schedule, abbreviated "GS", is the basic pay schedule for employees of the Federal Government. See 5 U.S.C., sec. 5332 (2006).
5. The administrative law context of the CDP "officer or employee"
Today the Federal Government employs a corps of about 5,000 hearing officers who adjudicate cases for dozens of its agencies. Raymond Limon, Office of Admin. Law Judges, Office of Pers. Mgmt., "The Federal Administrative Judiciary, Then and Now, A Decade of Change 1992-2002", at 3 (Dec. 23, 2002). Fewer than a third of those positions are classified as administrative law judges (ALJS) under the Administrative Procedure Act (APA), and the remainder of those positions are commonly referred to as non-ALJ hearing officers. Over 80 percent of ALJS are currently employed by the Social Security Administration (SSA). OPM Report (showing the SSA employed 1,128 of 1,388 ALJS in June 2008). None of the SSA'S ALJS are appointed by the Commissioner of the SSA, who serves as the department head. See Soc. Sec. Admin., ODAR Redelegations of Personnel and Equal Employment Opportunity Authorities (September 2006). Instead, the authority to appoint ALJS for the SSA is delegated to the Deputy Commissioner for the Office of Disability Adjudication and Review of the SSA. Id. Therefore, the great majority of ALJS are not appointed pursuant to the Appointments Clause.
Id. at 1-4 (showing that the Federal Government employed 1,351 ALJs and 3,370 non-ALJ hearing officers in 2002); see also Office of Pers. Mgmt., Federal Administrative Law Judges, By Agency and Level, CDPF Status Report as of June 2008 (OPM Report) (showing the Federal Government employed 1,388 ALJs in June 2008). Justice Breyer determined that there are currently 1,584 ALJs. See Free Enter. Fund v. PCAOB, 561 U.S. at ___, 130 S. Ct. at 3180-3181 (Breyer, J., dissenting).
ALJS are hired pursuant to 5 U.S.C., sec. 3105 (2006). An agency may appoint an individual as an ALJ only after the Office of Personnel Management certifies that individual as eligible for the position. 5 C.F.R. sec. 930.204 (2008). The APA generally requires that an ALJ preside over "every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing". 5 U.S.C., sec. 554 (2006). If the adjudication is a so-called on the record hearing, then the hearing is a "formal adjudication" that must adhere to the formal hearing procedures of the APA, which provide, inter alia, that each party is entitled to present oral or documentary evidence, submit rebuttal evidence, and conduct cross-examination. 5 U.S.C., secs. 554- 557. When presiding over an "on the record" hearing, ALJS have the authority to require attendance at the hearing, to administer oaths and affirmations, to issue subpoenas, to rule on offers of proof and receive evidence, and to order depositions. Id.
However, if the relevant statute does not require an "on the record" hearing, then the formal hearing procedures of the APA do not apply and a non-ALJ hearing officer may preside over the adjudication. See id. Sections 6320 and 6330 do not require an "on the record" CDP hearing, see Davis v. Commissioner, 115 T.C. at 41-42 (citing 26 C.F.R. sec. 601.106(c), Statement of Procedural Rules); and thus even apart from section 6330(b)(3) (allowing a CDP hearing before "an officer or employee"), APA procedures would not require the 1RS to use ALJS to conduct CDP hearings. Therefore, the appeals officer who conducts and adjudicates a CDP hearing is more comparable to a non-ALJ hearing officer than to an ALJ.
The CDP hearing officer, hired and not constitutionally "appointed", is by no means unique in the context of administrative adjudication.
III. The status of the CDP "officer or employee" and "appeals officer" under the Appointments Clause
In order to determine whether the "officer or employee" (or the "appeals officer") of section 6330 is an "inferior Officer" who must be appointed in compliance with the Appointments Clause, we consider the two issues prompted by the text of the clause.
A. Whether the position is "established by Law"
"[T]he threshold trigger for the Appointments Clause" is that an office be "`established by Law`". Landry v. FDIC, 204 F.3d at 1133. We hold that there is no CDP hearing officer position "established by Law" under sections 6320 and 6330 whose incumbent could be an officer subject to the Appointments Clause.
1. Creation by statute
Where "the `duties, salary, and means of appointment' for the office were specified by statute", that is considered "a factor that has proved relevant in the [Supreme] Court's Appointments Clause jurisprudence." Id. (quoting Freytag v. Commissioner, 501 U.S. at 881). If there were a statutory provision to the effect that "There shall be, within the Internal Revenue Service Office of Appeals, officers designated as Appeals Officers, who shall conduct CDP hearings", etc., then that would be some indication that the Appeals Officer position was "established by Law". There is no such statute, and this lack is some indication that the position in question is not an office "established by Law".
The 1RS Office of Appeals was not, in its current form, initially created by the Internal Revenue Code, nor were its "Appeals Officers". Congress did explicitly "establish" in the Internal Revenue Code certain officers who are to be appointed by the President, with the advice and consent of the Senate — i.e., the Commissioner, sec. 7803(a)(1), the Chief Counsel, sec. 7803(b)(1), and members of the Internal Revenue Service Oversight Board, sec. 7802(b)(1) — and the National Taxpayer Advocate (sec. 7803(c)(1)), who is appointed by the Secretary of the Treasury. Otherwise, the employment of "Other Personnel" is authorized in Section 7804(a), which, as we noted above, simply provides that "the Commissioner of Internal Revenue is authorized to employ such number of persons as the Commissioner deems proper". Congress thus left to the Executive Branch almost the entire personnel structure of the 1RS and refrained from establishing other particular offices within it.
Although the Office of Appeals was originally a creature of regulation, the multiple references to it that were added to the Code in 1998, see part II.B above, make it at least arguable that the Office of Appeals is now required by statute. However, there is no constitutional issue as to whether the Office of Appeals itself was "establish[ed] by Law"; rather, the issue is whether there are, within the Office of Appeals, personnel who are "officers" whose positions are "established by Law".
The National Taxpayer Advocate's predecessor, the Taxpayer Advocate, was appointed by the Commissioner of Internal Revenue, pursuant to former section 7802(d)(1).
As is shown above in part II.B., it was the Executive Branch that created the 1RS Office of Appeals and its personnel structure, pursuant to that authority in section 7804(a). When Congress enacted in 1998 the CDP provisions in sections 6320 and 6330, it employed that pre-existing Office of Appeals and committed the new CDP function to that office. Sees. 6320(b)(1), 6330(b)(1), (d)(2). Mr. Tucker contends that the RRA established the pre-existing Appeals Officer position as the CDP hearing officer. The statute does refer to an "appeals officer" as the person who "obtain[s] verification * * * that the requirements of any applicable law or administrative procedure have been met", sec. 6330(c)(1), and who makes the "determination" whether to proceed with collection, sec. 6330(c)(3). However, for the following reasons we conclude that section 6330 uses the term "appeals officer" interchangeably with the term "officer or employee":
First, the provisions in the lien statute, section 6320(b)(3), and in the levy statute, section 6330(b)(3), that actually state who shall conduct the hearing state that "the hearing * * * shall be conducted by an officer or employee who has had no prior involvement with respect to the unpaid tax". (Emphasis added.) This is the first and only mention of an individual in the lien statute and the first mention of an individual in the levy statute. The caption of each paragraph is "Impartial officer", thereby explicitly indicating that it might be an "officer or employee" who serves as the "Impartial officer". (Emphasis added.) This shows that Congress did not use the term "officer" in any specialized sense. The phrase "or employee" is so contrary to Mr. Tucker's position that he is forced to declare the phrase "mere surplusage". However, we decline to read words out of the statute; rather, we attempt to give meaning to every word that Congress enacted, and here that is best accomplished by taking at face value the phrase "officer or employee" in sections 6320(b)(3) and 6330(b)(3) (emphasis added), and by understanding the phrase "appeals officer" in section 6330(c)(1) and (3) as short-hand for an officer or employee in the Office of Appeals. If Congress had intended to assign CDP duty to a particular rank of "Appeals Officer", it would not have added the phrase "or employee"; and it could have used language like that which it used simultaneously in RRA section 3105 where it provided that a bond issuer could appeal an adverse ruling "to a senior officer of the Internal Revenue Service Office of Appeals". (Emphasis added.)
Second, the conference report describing the provision does on one occasion use the designation " appeals officer" but almost immediately thereafter uses the designation " appellate officer". H. Conf. Rept. 105-599, at 264 (1998), 1998-3 C.B. 747, 1018 (emphasis added).
See also S. Rept. 105-174, at 68 (1998), 1998-3 C.B. 537, 604 ("The determination of the appeals officer"; "the determination of the appellate officer"; "the appellate officer's determination" (emphasis added)).
Neither the statute itself nor the legislative history shows that Congress intended to ascribe any particular importance or significance to the term "appeals officer". We hold that, for purposes of section 6330(c)(1) and (3), an "appeals officer" is any "officer or employee" in the 1RS Office of Appeals to whom is assigned the task of conducting a CDP hearing under section 6330(b)(3).
See Powers v. Commissioner, T.C. Memo. 2009-229; Reynolds v. Commissioner, T.C. Memo. 2006-192.
The statute thus does not create any positions for the personnel who would perform the CDP function but rather refers to them in a most diffuse manner ("conducted by an officer or employee"). After the enactment of this statute, it was not possible to point to a position responsible for conducting CDP hearings and to question whether the person in that position was an "inferior Officer"; instead the hearings would be conducted by "employees" yet to be designated, from time to time, within the Office of Appeals. Thus, the mere mention of an "officer or employee" or an "appeals officer" in sections 6320 and 6330 presumes but does not establish any position. In addition to sections 6320 and 6330, however, Mr. Tucker points to a reference to "appeals officer" in a provision of the RRA that has not been codified in the Code. RRA section 3465(b), 112 Stat. 768, 1998-3 C.B. 228, provides:
Mr. Tucker sets out an elaborate hypothetical circumstance, intended to show the importance of appeals officers, in which an appeals officer could end up holding jurisdiction over the three major U.S. car manufacturers and thereby "effectively become the United States `Car Czar`"; "she could effectively end the United States domestic automobile industry"; "She could be in charge of the companies' fates for years". Among the reasons that we are not influenced by this possibility is that it is the Office of Appeals, and not an individual officer or employee, that retains jurisdiction under section 6330(d)(2).
The mere mention of an office in the Code evidently does not establish that office or guarantee its continuance. Other administratively created 1RS positions have been mentioned from time to time in sections of the Code but have thereafter been abolished by agency restructuring and their functions delegated to other personnel. See, e.g., sec. 6334(e)(2)(A) (mentioning "district director"); sec. 7611(b)(3)(C) (mentioning "regional commissioner").
For the two other uncodified references to "appeals officers" in the RRA, see supra note 52.
The Commissioner of Internal Revenue shall ensure that
an appeals officer is regularly available in each State. [Emphasis added.]
This provision, however, has little to do with the CDP hearing or its presiding "officer or employee". (Emphasis added.) The statute certainly does not establish (or even imply) a CDP hearing officer "in each State". That is, even if the statute were read to mean that "There shall be, and is hereby established, an 1RS official known as `Appeals Officer' in each State", Congress would not, by creating such an official, establish a CDP hearing officer, as Mr. Tucker's argument would require. Whatever that "appeals officer * * * in each state" might be tasked with doing, Congress made clear in sections 6320(b)(3) and 6330(b)(3) that a CDP hearing can be staffed by an "officer or employee". (Emphasis added.)
We therefore hold that the RRA did not establish the position of a CDP "appeals officer".
2. Creation by regulation
However, Mr. Tucker contends, in effect, that proper Appointments Clause analysis must consider both statute and regulations. We therefore consider whether an office might be "established" by the RRA taken together with the regime for the Office of Appeals that is established in the regulations. It is true that the case law does not posit a bright-line rule that would require an explicit statutory creation of an office before there can be an "officer" for purposes of the Appointments Clause. Opinions of the Courts of Appeals for the Third, Fifth, and Sixth Circuits seem to tend to the contrary:
In Free Enter. Fund v. PCAOB, 561 U.S. at ___, 130 S. Ct. at 3179 (Breyer, J., dissenting), Justice Breyer asserts explicitly that an "office" can be "created either by `regulations' or by `statute,`" for which he cites United States v. Mount, 124 U.S. 303, 307-308 (1888) ("there is no statute authorizing the secretary of the navy to appoint a pay-master's clerk, nor is there any act requiring his approval of such an appointment, and the regulations of the navy do not seem to require any such appointment or approval for the holding of that position. The claimant, therefore, was not an officer" (emphasis added)).
The Administrative Review Board (ARB) of the Department of Labor, composed of three "members" appointed by the Secretary of Labor, "`issu[es] final agency decisions on questions of law and fact arising in review or on appeal' in whistle-blower cases." Willy v. Admin. Review Bd., 423 F.3d 483, 491 (5th Cir. 2005) (quoting 61 Fed. Reg. 19978 (May 3, 1996)). The ARB was created not by statute but by an order of the Secretary of Labor, pursuant to 5 U.S.C., sec. 301 (2006), which provides that "[t]he head of an Executive department * * * may prescribe regulations for the government of his department, the conduct of its employees, [and] the distribution and performance of its business". Both the Courts of Appeals for the Fifth Circuit, see Willy v. Admin. Review Bd., 423 F.3d at 491-492, and the Sixth Circuit, see Holtzclaw v. Sec. of Labor, 172 F.3d 872 (6th Cir. 1999); Varnadore v. Sec. of Labor, 141 F.3d 625, 631 (6th Cir. 1998), approved the creation of the ARB as being within the general authority granted to the Secretary of Labor under 5 U.S.C., sec. 301 (2006), analyzed the position of member on the ARB under the Appointments Clause and found it to be an "inferior Officer", and held that Congress, by 5 U.S.C., sec. 301, had authorized the Secretary to make the appointments, which satisfied the requirements of the Appointments Clause.
Similarly, the Appeals Board of the Department of Health and Human Services (HHS), composed of members appointed by the Secretary of HHS, resolves disputes under the Child Support Enforcement Act, 42 U.S.C., secs. 651- 669(b) (2006). Pennsylvania v. HHS, 80 F.3d 796, 800 (3d Cir. 1996). The Appeals Board was created not by statute but by regulation, 45 C.F.R. pt. 16 (1981), promulgated by the Secretary of HHS, pursuant to 42 U.S.C., sec. 913 (2006), which provides: "The Secretary is authorized to appoint and fix the compensation of such officers and employees, and to make such expenditures as may be necessary for carrying out the functions of the Secretary under this chapter." The Court of Appeals for the Third Circuit approved the creation of the Appeals Board as being within the general authority granted to the Secretary of HHS under 42 U.S.C., sec. 913, analyzed the position of member on the Appeals Board under the Appointments Clause and found it to be an "inferior Officer", and held that Congress, by 42 U.S.C., sec. 913, had authorized the Secretary to make the appointments, which satisfied the requirements of the Appointments Clause. Pennsylvania v. HHS, supra at 804-805.
None of these opinions suggests that any party had argued that the positions under review were not "established by Law". Rather, the parties and the courts seem to have assumed that if the positions existed, then the positions were "established by Law". If this assumption is correct, then it would seem that any "Office" that actually exists in the Federal Government is arguably "established by Law".
For a defense of this position, see Stephen G. Bradbury, "Officers of the United States Within the Meaning of the Appointments Clause", 31 Op. Off. Legal Counsel, at *36-38, 2007 OLC LEXIS 3, *117-123 (Apr. 16, 2007).
The Supreme Court has not so held, and the assumption is problematic, in that it risks reading out of the Constitution the phrase "established by Law", if the Appointments Clause would mean the same thing with or without that phrase. One could argue instead that only a position created by a statute can be "established by Law" for purposes of the Appointments Clause. If a position is created not by Congress but by the Executive, then by definition there is no possibility that Congress both created and filled that position, which is the chief danger against which the clause is a safeguard.
However, if the phrase "established by Law" were construed to mean that the Appointments Clause can apply only to a position expressly created by a statute, then abuses could arise. For example, Congress could take a pre-existing low-level position (which had been created by the Executive Branch pursuant to a general authorization like section 7804(a), and which was not subject to appointment by the President or a Head of a Department) and could invest it with significant additional power, thus evading the Appointments Clause by seeming to avoid "establishing" the office.
An analogous abuse via "indirection" was hypothesized in Springer v. Govt, of the Philippine Islands, 277 U.S. 189, 202 (1928), when the Court stated: "the legislature cannot ingraft executive duties upon a legislative office, since that would be to usurp the power of appointment by indirection". The Court did go on to observe that "the case might be different if the additional duties were devolved upon an appointee of the executive", id., but it did not elaborate on this scenario.
Where such a pattern existed, the courts would have to see through the subterfuge and enforce the Appointments Clause. Mr. Tucker argues that the CDP provisions involve just this problem — i.e., that Congress took the existing Appeals Officer position and invested it with the "significant authority" (discussed below in part II.B.2) of the CDP process.
The argument fails, however, because Congress has assigned the CDP hearing function not to a particular rank or title of "Appeals Officer" nor to any other identifiable office-holder but generally to the Office of Appeals and, within it, to any "officer or employee", sees. 6320(b)(3), 6330(b)(3), from among the "number of persons" who are employed in that Office "as the Commissioner deems proper for the administration and enforcement of the internal revenue laws", sec. 7804(a). Likewise, even under the regulations the CDP responsibility does not inhere in any specific office or position. Pursuant to the administrative arrangements of the Office of Appeals, 250 employees are designated to perform that CDP function, but it is within the agency's authority under section 6330 to allocate the function as it will among its 1,100 settlement officers and Appeals Officers. The Appointments Clause applies only when an office is "established by Law", but there is no office established by statute or regulation to which Congress committed the CDP function.
B. Whether the CDP function could constitute an "office"
If, however, a position is "established by Law", the second question in an Appointments Clause inquiry is whether that position constitutes an office of the United States. Only "offices" are subject to the requirements of the clause, and not every position that is "established by Law" is an office. See Freytag v. Commissioner, 501 U.S. at 880-881. Assuming arguendo that the CDP function prescribed under sections 6320 and 6330 and the regulations thereunder is committed to a position "established by Law", we must determine whether that position could constitute an "office".
The requirements of the Appointments Clause are not implicated unless an "office" exists. Freytag v. Commissioner, 501 U.S. at 880 (citing Buckley v. Valeo, 424 U.S. 1, 126 n. 162 (1976)). Even if the position of a non-officer employee is clearly established by law, i.e., "the duties, salary, and means of appointment * * * are specified by statute", id., at 881, appointments to that position need not conform to the Appointments Clause, id. at 880-881. In Freytag, the Supreme Court noted that the position of Special Trial Judge on this Court is "established by Law", but nonetheless stated that Special Trial Judges "need not be selected in compliance with the strict requirements of [the clause]" "if we * * * conclude that a special trial judge is only an employee". Id. Likewise, in Landry v. FDIC, 204 F.3d 1125, 1133-1134 (D.C. Cir. 2000), the Court of Appeals for the District of Columbia Circuit noted that the position of ALJ for the Federal Deposit Insurance Corporation is "established by Law", but held that the position does not constitute an office. Moreover, the history of internal revenue collection in the United States is replete with officials whose positions were specified by statute, but were not appointed pursuant to the requirements of the clause. See supra pt. II.C.2.C.
The Supreme Court has articulated two essential characteristics that a position must have in order to constitute an office: A position is an office if (i) it is invested with "significant authority pursuant to the laws of the United States", Buckley v. Voleo, 424 U.S. at 126, and (ii) it is "continuing", Auffmordt v. Hedden, 137 U.S. 310, 326-328 (1890); United States v. Germaine, 99 U.S. at 511-512; United States v. Hartwell, 73 U.S. 385, 393 (1868). Whether a position possesses these characteristics and thus constitutes an office "is determined by the manner in which Congress has specifically provided for the creation of the several positions, their duties and appointment thereto." Burnap v. United States, 252 U.S. 512, 516 (1920). Therefore, we examine the specific features of the "officer or employee" position within the CDP function to determine whether it is a "continuing" office invested with "significant authority".
1. Whether the CDP provisions created a "continuing" position
A position is "continuing" if it possesses "`tenure, duration, emolument, and duties`" that are "`continuing and permanent, not occasional or temporary.`" Auffmordt v. Hedden, supra at 327 (quoting United States v. Germaine, supra at 511-512). A position is most clearly "continuing" if it is permanently assigned sovereign authority that does not expire, inter alia, upon the passage of time or the completion of a discrete task. See Auffmordt v. Hedden, supra at 326-328; United States v. Germaine, supra at 511-512; United States v. Hartwell, supra at 393. Respondent concedes that, if the CDP "appeals officer" is a position "established by Law", then it is a "continuing" position; and we therefore proceed to consider whether that position is given "significant authority", so that the person holding that position would be an officer (i.e., an "inferior Officer") rather than a non-officer employee.
2. Whether the CDP hearing officer has "significant authority"
In Buckley v. Valeo, supra at 126, the Supreme Court held that a position invested with "significant authority" is an office:
We think that the term "Officers of the United States" as used in Art. II, defined to include "all persons who can be said to hold an office under the government" in
United States v. Germaine, supra, is a term intended to have substantive meaning. We think its fair import is that any appointee exercising significant authority pursuant to the laws of the United States is an "Officer of the United States," and must, therefore, be appointed in the manner prescribed by § 2, cl. 2, of that Article.
In that case the Supreme Court examined the powers of the eight-member Federal Election Commission (FEC) established under the Federal Election Campaign Act of 1971 (1971 Act), Pub.L. 92-225, 86 Stat. 3, as amended by the Federal Election Campaign Act Amendments of 1974, Pub.L. 93-443, 88 Stat. 1263. Id. at 137-141. The Supreme Court concluded that none of the FEC's commissioners were appointed in conformity with the clause, and thus, none of them were constitutionally permitted to exercise "significant authority". Id. at 137. It then sorted the FEC's statutorily authorized powers into three categories in order to determine whether the powers in each category constituted significant authority:
[T]he Commission's powers fall generally into three categories: functions relating to the flow of necessary information — receipt, dissemination, and investigation; functions with respect to the Commission's task of fleshing out the statute — rulemaking and advisory opinions; and functions necessary to ensure compliance with the statute and rules — informal procedures, administrative determinations and hearings, and civil suits. [
Id.]
The Supreme Court held that it was constitutionally permissible for the unappointed commissioners to exercise their investigatory and informative powers, because in so doing they were merely aiding Congress in performing its legislative function. Id. at 137-138. Since Congress could delegate those powers to its own committees, the Supreme Court stated "there can be no question" that Congress could delegate them to the FEC by statute. Id.
However, the Supreme Court held that it was not permissible for the unappointed commissioners to exercise their "more substantial [enforcement and interpretive] powers". Id. at 138. First, the Supreme Court held that only "Officers of the United States" could exercise the commissioners' power to bring suit to enforce the 1971 Act, because that power "is the ultimate remedy for a breach of the law" and belongs to the Executive — not Legislative — Branch. Id. at 138-140. Second, the Supreme Court held that only "Officers of the United States" could exercise the commissioners' power to interpret the entire 1971 Act through rulemaking, advisory opinions, and determinations — without supervision from either Congress or the Executive Branch — because that power "represents the performance of a significant governmental duty exercised pursuant to a public law." Id. at 140-141. From Buckley we therefore draw the general principle that only an "officer" may perform "significant" enforcement and interpretive functions. See id. at 124-141. In particular, the powers (i) to bring suit to enforce an Act of Congress and (ii) to issue regulations, advisory opinions, and determinations without supervision under an Act of Congress both constitute "significant authority".
The Supreme Court has yet to fully define the term "significant authority"; and "ascertaining the test's real meaning requires a look at the roles of the employees whose status was at issue in other cases." Landry v. FDIC, 204 F.3d at 1133. In the two cases most analogous to our facts, the Supreme Court in Freytag and the Court of Appeals for the District of Columbia Circuit in Landry analyzed whether different adjudicative positions constituted "offices". In Freytag the Supreme Court faced the question whether a Special Trial Judge (STJ) of the Tax Court is an "inferior Officer"; and it observed that in some matters the STJ will "only hear the case and prepare proposed findings and an opinion" while in other matters the STJ may be assigned "not only to hear and report on a case but to decide it". Freytag v. Commissioner, 501 U.S. at 873. In deciding that STJs are "inferior Officers", the Supreme Court relied on the authority of STJs to render the final decision of this Court in some of the matters that come before them. See id. at 882.
While "significant authority" is an essential characteristic of an "office", Buckley v. Valeo, 424 U.S. at 126, this proposition cannot be construed to mean that non-officer employees of the Federal Government are insignificant or trivial. Mr. Tucker suggests that treating "appeals officers" as non-officer employees not subject to the Appointments Clause is to regard them as "unimportant". We disagree. For example, military ranks reflect the same distinction between officers who are appointed in compliance with the Appointments Clause, see 10 U.S.C., secs. 531, 571, 624 (2006), and non-officers who are not. However, those non-officers include "noncommissioned officers" (sergeants, corporals, and petty officers) who are promoted (not appointed) from among enlisted personnel. See, e.g., Army Regulation 600-8-19 ("Enlisted Promotions and Reductions"), ch. 3 ("Semicentralized Promotions (Sergeant and Staff Sergeant)"), sec. 3.1. No one could reasonably call the role of noncommissioned officers "insignificant". They have command of the enlisted personnel under them, and insubordination or disobedience of their commands is punishable by court-martial. See 10 U.S.C., sec. 891 (2006). Thus, the issue here is not whether appeals officers are unimportant, but whether they are "Officers of the United States".
In contrast, in Landry v. FDIC, supra at 1134, the Court of Appeals decided that ALJs for the Federal Deposit Insurance Corporation (FDIC) are not inferior officers. Both the ALJs in Landry and the STJs on this Court "`take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.`" Id. (quoting Freytag v. Commissioner, 501 U.S. at 881-882). However, unlike the STJs, the ALJs lacked the power to make final decisions. Id. at 1133. Instead, ALJs file a recommended decision, 12 C.F.R. sec. 308.38 (1996), which the FDIC'S board of directors reviews de novo before it issues the final decision of the agency, id. sec. 308.40(a), (c). This lack of finality led the Court of Appeals to conclude that the ALJs in question are not officers. Landry v. FDIC, supra at 1134.
This focus in Landry on final decision-making power is an appropriate application of the Supreme Court's earlier analysis of the FEC'S interpretive powers in Buckley v. Valeo, 424 U.S. at 140-141, which held that the power to interpret the 1971 Act "free from day-to-day supervision of either Congress or the Executive Branch" constitutes significant authority. The power to make a final decision, which the Supreme Court described as "independent authority" in Freytag v. Commissioner, supra at 882, is a species of the power to act without supervision. See Buckley v. Valeo, supra at 141. Therefore, a position that is invested with broad adjudicative powers, like the position of STJ, may be an office if the incumbent can act free of supervision or has the final say within the agency. See Freytag v. Commissioner, supra at 882. However, such a position is not an office if the incumbent and her determinations are subject to supervision. See Landry v. FDIC, supra at 1133-1134.
Mr. Tucker and the amicus contend that the positions of settlement officer and team manager within the Office of Appeals are invested with "significant authority". In particular, Mr. Tucker posits that "Settlement Officers, and/or Appeals team managers holding CDP hearings are so similar to Special Trial Judges in all ways that mattered to the Supreme Court in its Freytag Appointments Clause analysis that any differences are not of Constitutional significance." We disagree.
While settlement officers, appeals officers, and team managers can be said to possess adjudicative powers to conduct hearings and to issue determinations to resolve those hearings, none possess the power to make final decisions for the 1RS. Contrary to Mr. Tucker's assertion that "[n]otices of determination issued by Appeals personnel after CDP hearings are final and binding on the 1RS", determinations by settlement officers and Appeals team managers are not "final" in the sense that is relevant to the Appointments Clause. They review only a particular collection episode — a given notice of lien or notice of proposed levy. As is discussed above in part U.C.3.a, in the absence of a written agreement with the taxpayer, the Office of Appeals (not the appeals officer) retains jurisdiction to reconsider and overturn its personnel's determinations with respect to collection action. Sec. 6330(d)(2). If Mr. Tucker's circumstances were to change, and it became clear that he could never repay the 1RS, nothing would prevent collection personnel from relenting or prevent the Office of Appeals from holding a supplemental CDP hearing and revising its personnel's prior determination to uphold the tax lien.
Even determinations with respect to underlying liability by the personnel of the Office of Appeals are not binding on the 1RS and may be overturned during audit reconsideration or overruled by the IRS Office of Chief Counsel in taking litigation positions or settling cases. See supra part II.C.3.b. The Office of Chief Counsel, not the Office of Appeals, has authority to "[n]egotiate or make a settlement in any case docketed in the Tax Court if the * * * determination was issued by Appeals officials". 26 C.F.R. sec. 601.106(a)(2)(i), Statement of Procedural Rules. Here, the Office of Chief Counsel was free to contest or settle Mr. Tucker's case, not-withstanding the team manager's determinations to uphold the tax lien at issue.
No position within the Office of Appeals is invested, in the CDP context, with the "final" decision-making power that may be exercised only by an "officer of the United States". For that reason, settlement officers, appeals officers, and team managers are more analogous to the ALJs in Landry than to the STJs in Freytag.
Moreover, non-officer ALJs have the authority to conduct "on the record" hearings, to require attendance at those hearings, to administer oaths and affirmations, to issue subpoenas, to rule on offers of proof and receive evidence, and to order depositions. 5 U.S.C., secs. 554- 557. Despite this authority, the Court of Appeals for the District of Columbia Circuit held that the ALJs in Landry are not officers because they lack final decision-making power. Landry v. FDIC, 204 F.3d at 1133-1134. In contrast, settlement officers, appeals officers, and team managers lack not only final decision-making power but also these formal powers granted to ALJs under the Administrative Procedure Act. See 26 C.F.R. sec. 301.6330-1(d)(2), QA-D6, Proced. Admin. Regs, CDP hearings are "informal in nature" and do not even require a face-to-face meeting. Id.
The status of ALJs as employees or "Officers of the United States" is "disputed". Free Enter. Fund v. PCAOB, 516 U.S. at ___ n. 10, 130 S. Ct. at 3160 (citing Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000)). In Landry a divided panel of the Court of Appeals for the D.C. Circuit held that ALJs for the FDIC are not officers. However, in Free Enter. Fund v. PCAOB, dissenting Justice Breyer apparently indicates that he would hold that all ALJs are officers. 516 U.S. at ___, 130 S. Ct. at 3180 (Breyer, J., dissenting) (citing Freytag v. Commissioner, 501 U.S. at 910 (Scalia, J., concurring in part and concurring in judgment)). No court has held contrary to Landry, and we follow it. However, even assuming arguendo that ALJs are "Officers of the United States", it does not follow that CDP hearing officers are likewise "officers". CDP hearing officers lack not only final decision-making power but also the formal powers granted to ALJs. Whether or not the position of ALJ constitutes an "Office[] of the United States", the lesser position of CDP "appeals officer" is not an "office".
Since we find persuasive the reasoning of the Court of Appeals for the District of Columbia Circuit in its determination that ALJs for the FDIC do not exercise "significant authority", we hold that the lesser position of CDP "appeals officer" ("or employee") within the Office of Appeals likewise does not exercise "significant authority". We therefore hold that the positions of settlement officer, appeals officer, and team manager are not invested with "significant authority" under Buckley v. Voleo, 424 U.S. at 126.
Conclusion
An "officer or employee" of the 1RS Office of Appeals who conducts CDP hearings has neither a position "established by Law" nor "significant authority" that is characteristic of an "officer of the United States" for purposes of the Appointments Clause. Without at all minimizing the importance of conducting a CDP hearing, that function does not involve an authority more "significant" than the authority exercised by other personnel important to tax administration (whether the Chief of the Office of Appeals (their superior), other high-ranking officials in the 1RS, or many internal revenue collection personnel over the past 200 years) or as significant as the authority exercised by ALJS in many other agencies. To survey these thousands of employees important to the administration of law and single out 1RS "appeals officers" as somehow requiring constitutional appointment would be unwarranted. They are instead properly hired, pursuant to section 7804(a), under the authority of the Commissioner of Internal Revenue.
To reflect the foregoing,
An appropriate order will be issued.