We welcome back previous guest blogger Susan C. Morse, who is the Angus G. Wynne Sr. Professor in Civil Jurisprudence and Associate Dean for Academic Affairs at the University of Texas at Austin School of Law.
Is it ever too late to raise an administrative procedure challenge to an old tax regulation?
Consider the pair of cases that has produced a circuit split between the Sixth and the Eleventh Circuits over the adequacy of notice-and-comment for a conservation easement final regulation. (Prior Procedurally Taxing coverage here and here.) The Sixth Circuit held in Oakbrook that the notice-and-comment process was sufficient. In contrast, the Eleventh Circuit concluded in Hewitt that Treasury “violated the Administrative Procedure Act’s requirements” when it promulgated the regulation and that therefore the IRS Commissioner’s application of the regulation was “invalid.” But neither court addressed the question of time. The regulation was promulgated in 1986 – decades before any of the facts arose in either case.
Does time ever limit taxpayers’ ability to raise administrative procedure challenges long after the promulgation of a regulation? Consider 28 U.S.C. § 2401(a), the default limitations period for suits against the federal government. It provides that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.”
The limitations period analysis turns on when the “right of action” to raise an administrative procedure challenge to a regulation “first accrues.” For instance, in Oakbrook and Hewitt, if this right accrued in 1986, when Treasury promulgated the regulation at issue, then the taxpayers’ claims should have been time-barred. On this theory, the taxpayers were allowed to litigate because the government did not raise 28 U.S.C. § 2401(a) as a defense. (The government can waive the defense, as it’s not jurisdictional.) If the government had raised the six-year limitations period defense, the Oakbrook or Hewitt taxpayer would have had to argue that the right of action first accrued later, when the regulation was applied to the taxpayer’s case, or that an exception to the limitations period should apply.
Now the government has begun to raise the six-year limitations period defense, first in July 2022, in the Govig case, pending in the federal district court in Arizona. Govig involves Notice 2007-83, which was issued nine years before penalties were first proposed on Govig for the 2016 tax year, relating to the employee welfare benefit arrangement established by the taxpayer in 2015. In Govig, the taxpayer claims that the Notice is invalid because it was issued without notice and comment, and relies on the Sixth Circuit’s decision in Mann Construction. In Mann Construction, though, the government did not raise the six-year limitations period defense.
More than half the Courts of Appeal – the Second, Fourth, Fifth, Sixth, Ninth, Eleventh, D.C., and Federal Circuits – have accepted that for administrative procedure claims, the default six-year limitations period begins to run when the challenged regulation or guidance issues, in other words at the time of final agency action. This limitations period statute exists against the background of sovereign immunity, meaning that it is an exercise of Congressional power to specify on what terms the federal government may be sued. In contrast, for certain other claims, such as claims that the agency exceeded its statutory authority, the limitations period begins to run when the regulation or guidance is applied. This is called the Wind River doctrine after a key 1991 Ninth Circuit case. The Wind River doctrine would say that the limitations period for an administrative procedure challenge to Notice 2007-83 began to run in 2007 and expired in 2013, before any relevant facts arose in the Govig case.
It may seem an awkward reading to suggest that a “right of action first accrues” with the earlier issuance of a Notice, especially when the specific controversy between the taxpayer and the government arises from later enforcement proceedings. And yet that is what the cases hold. As an example, consider Sai Kwan Wong, a 2009 Second Circuit case where the plaintiff sought to challenge a Medicaid rule that treated social security disability income as an amount that offsets Medicaid funding of nursing home care, even if that income was deposited into a special needs trust. The Department of Health and Human Services had promulgated a rule providing this offset treatment in 1980, apparently without using notice and comment. The plaintiff did not have standing until 2006, when his legal guardian began to direct the plaintiff’s disability income to a special needs trust, thus raising the question of whether the offset rule would apply. The Second Circuit held that the six-year limitation period began to run in 1980, when the guidance issued, and not in 2006, when the plaintiff had standing. It then barred the plaintiff’s administrative procedure claim.
The theory that underpins cases like Sai Kwan Wong is articulated in Shiny Rock, a 1990 Ninth Circuit case that preceded Wind River by one year. There, the court explained that any injury “was that incurred by all persons .. in 1964” when the Bureau of Land Management issued a public land order – not in 1979, when Bureau applied the order to deny the plaintiff’s mineral patent application. The Shiny Rock court suggests that the rights that are vindicated by an administrative procedure challenge are the general public rights to participate in the administrative procedure process. A later-accrual approach, added the Shiny Rock court, “would virtually nullify the statute of limitations,” since it would always be possible for the old administrative order to applied later, to a new plaintiff who had later gained standing. Viewed this way, the case law consensus that the limitations period begins to accrue when a regulation is promulgated makes sense.
An alternative reading of 28 U.S.C. § 2401(a) might be that a particular plaintiff’s right of action cannot accrue until the plaintiff has standing. This reading is grounded in a private law understanding of the statutory provision, which envisions the government as party to a contract or tort action that arises from a specific transaction or interaction between the government and a plaintiff. But administrative procedure violations are not like these private law causes of action. They arise not from a specific interaction between government and plaintiff, but rather from the alleged failure of a process that is supposed to serve the general public function of producing better administrative law.
Thus, in Govig, if the District of Arizona follows Ninth Circuit precedent, it should conclude that the administrative procedure challenge to Notice 2007-83 is time-barred – unless, of course, the Govig plaintiffs can persuade the court that an exception to the limitations period applies. There is little in the facts of Govig that would support an equitable tolling or equitable estoppel argument. For instance, the government did not hide information or delay enforcement in order to wait out the limitations period. Instead, the facts of the case did not arise until after the limitations period had expired.
An issue that may arise in Govig relates to intervening case law. This is because the Govig plaintiff arguably relies on CIC Services, a 2021 Supreme Court case that held that some facial or pre-enforcement challenges are permitted in tax, despite the Anti-Injunction Act. (Prior Procedurally Taxing coverage here, here, and here).Historically, intervening case law has restarted the 28 U.S.C. § 2401(a) limitations period when a case has only prospective effect – but not if the case has (as is typical) retroactive effect. Plus, more recent Supreme Court precedent emphasizes that its applications of federal law “must be given full retroactive effect …as to all events, regardless of whether such events predate or postdate the announcement of the rule.” The intervening case law argument seems unlikely to offer the Govig plaintiff an exception to the time limitation of 28 U.S.C. § 2401(a).
The Govig case is one to watch. If the Arizona federal district court follows prevailing case law, it will likely allow the government’s limitations period defense and time bar the plaintiff’s administrative procedure claim. The availability of such time bars would reshape the landscape of administrative procedure in tax by putting APA claims on the clock and replacing the assumption that the government will waive the 28 U.S.C. § 2401(a) limitations period defense.
For further reading, if of interest: I have posted a preliminary draft here with additional analysis of this limitations period issue.