Peter KURETSKI and Kathleen Kuretski, Appellants v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellee.
No. 13-1090.
United States Court of Appeals, District of Columbia Circuit.
Nov. 26, 2013. June 20, 2014.
755 F.3d 929
Bethany B. Hauser, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief was Teresa E. McLaughlin, Attorney.
Before: SRINIVASAN, Circuit Judge, and EDWARDS and SENTELLE, Senior Circuit Judges.
Opinion for the Court filed by Circuit Judge SRINIVASAN.
SRINIVASAN, Circuit Judge:
Peter and Kathleen Kuretski owed more than $22,000 in federal income taxes for the 2007 tax year. They paid none. The Internal Revenue Service assessed the unpaid amount plus penalties and interest, and then attempted to collect from the
The Kuretskis now contend that the Tax Court judge may have been biased in favor of the IRS in a manner that infringes the constitutional separation of powers. They point to
To our knowledge, this is the first case in any court of appeals to present the question of whether
I.
A.
When the Internal Revenue Service determines that a taxpayer owes more to the federal government than the taxpayer has paid, the IRS may make an assessment recording the taxpayer‘s outstanding liability. See
Until 1921, taxpayers had no pre-assessment opportunity to dispute the amount they owed the Treasury. Nor could they challenge a levy before its imposition. A taxpayer‘s only recourse was to pay the disputed amount and then bring a refund suit against the tax collector or the United States. See Flora v. United States, 362 U.S. 145, 151-52 (1960); Burns, Stix Friedman & Co. v. Comm‘r, 57 T.C. 392, 394 n. 7 (1971).
The Revenue Act of 1921 for the first time required giving taxpayers pre-assessment notice of a deficiency. The 1921 Act also provided that “[o]pportunity for hearing shall be granted” before assessment of
The Revenue Act of 1924 established the “Board of Tax Appeals” as “an independent agency in the executive branch of the Government.”
In 1942, Congress changed the name of the Board to “The Tax Court of the United States” and declared that the court‘s members “shall be known” as “judges.” See
More than a quarter of a century later, Congress enacted a series of additional changes to the statutes governing the Tax Court. See
There is hereby established, under article I of the Constitution of the United States, a court of record to be known as the United States Tax Court. The members of the Tax Court shall be the chief judge and the judges of the Tax Court.
Judges of the Tax Court may be removed by the President, after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.
After the 1969 Act, the Tax Court continued to provide a pre-assessment forum for taxpayers to challenge the IRS‘s deficiency determinations. Upon making an assessment, however, the IRS could levy on a delinquent taxpayer‘s property without any additional opportunity for a hearing. See United States v. Nat‘l Bank of Commerce, 472 U.S. 713, 720 (1985); United States v. Rodgers, 461 U.S. 677, 682-83 (1983). That
Under the 1998 Act, the IRS must give thirty days’ notice before levying on any property to collect unpaid taxes.
B.
On April 15, 2008, Peter and Kathleen Kuretski of Staten Island, N.Y., filed a joint federal income tax return for 2007 on which they reported a tax liability of $24,991 and claimed a withholding credit of $2,856. The Kuretskis did not include any payment of the liability reported on their return. Because the Kuretskis did not dispute the amount they owed, the IRS assessed the balance shown on the return along with penalties and interest. In October 2008, the IRS notified the Kuretskis that they owed $23,601.50 to the United States Treasury, and the IRS told the Kuretskis that it intended to levy on their property thirty days later unless they paid the amount due.
The Kuretskis, through their counsel, filed timely requests for a collection-due-process hearing on the ground that “a levy would create a burden and hardship” for the couple. The Kuretskis submitted an “offer in compromise,” proposing to pay $1,000 in five monthly installments of $200 to settle their outstanding tax liabilities, and they also asked for an abatement of penalties. See
In a letter to the Kuretskis’ attorney dated April 14, 2010, an IRS settlement officer rejected the Kuretskis’ offer in compromise. The letter explained that the Kuretskis’ equity in their home rendered the offer “unacceptable as an alternative for collection.” The settlement officer later told the Kuretskis’ attorney that the IRS might be willing to accept a full-payment installment agreement under which the Kuretskis would pay $250 a month for the next nine years.
On June 8, 2010, the Kuretskis’ attorney advised the IRS that her clients continued to seek a partial-payment agreement instead of the full-payment installment plan. On June 28, the Kuretskis and their attorney met with the settlement officer, but did not then (or later) accept the full-payment installment offer. On July 7, 2010, the settlement officer closed the Kuretskis’ case file. An IRS appeals team manager approved the settlement officer‘s decision the next day, and the IRS sent a notice of determination to the Kuretskis on July 20 informing them that their requests for a compromise and an abatement of penalties had been rejected. The Kuretskis appealed to the Tax Court. See
C.
On September 12, 2011, the Kuretskis’ case was tried before the Tax Court. As is relevant here, the Kuretskis, represented by new counsel, argued that the IRS settlement officer abused her discretion by closing their case file and issuing a notice of determination even though the parties were on the verge of reaching agreement on an alternate schedule for installment payments. The IRS settlement officer, however, testified that she had no recollection of any discussions on an alternate schedule, and that she had concluded by early July 2010 that she could no longer keep open the $250-a-month offer that had been on the table since April of that year. The Tax Court found that the “weight of the evidence” supported the settlement officer‘s account. Mem. Findings of Fact & Op. at 10. According to the Tax Court, the settlement officer had maintained a “firm stance” on the $250 figure through several months of negotiations, and an IRS officer “is not obligated to negotiate indefinitely.” Id. at 11.
The Kuretskis also alleged that they should avoid any liability for late-payment penalties because they had reasonable cause for their failure to pay. See
One month after the Tax Court‘s decision, the Kuretskis filed a motion for reconsideration and a motion to vacate the decision. The Kuretskis argued for the first time that the statute allowing for presidential removal of Tax Court judges,
On March 4, 2013, the Tax Court denied both motions. The court declined to address the Kuretskis’ Article III argument, concluding that they had failed to explain why they waited to raise the argument until after the court‘s initial decision. The Kuretskis appealed to this Court, and the parties stipulated that the D.C. Circuit is the proper venue for review. See
II.
The Kuretskis challenge the Tax Court‘s decision on both constitutional and nonconstitutional grounds. As to the latter, the Kuretskis argue that the Tax Court committed clear error in finding them liable for late-payment penalties under
Under
The Kuretskis contend that they “clearly had reasonable cause” for their failure to pay their taxes on time, thus entitling them to penalty relief under
III.
The Kuretskis’ principal contention on appeal is that the prospect of presidential removal of Tax Court judges under
A.
The IRS‘s first asserted basis for declining to reach the Kuretskis’ separation-of-powers argument is that they forfeited the claim by failing to raise it until their motion for reconsideration. The general rule in Tax Court cases is “not to consider an argument raised for the first time in a motion for reconsideration.” Cerand & Co. v. Comm‘r, 254 F.3d 258, 260 (D.C. Cir. 2001). But the Supreme Court has recognized an exception to the general rule: an appellate court may exercise its discretion to hear “a constitutional challenge that is neither frivolous nor disingenuous” if the “alleged defect ... goes to the validity of the Tax Court proceeding that is the basis for th[e] litigation.” Freytag v. Comm‘r, 501 U.S. 868, 879 (1991). In that situation, the “disruption to sound appellate process entailed by entertaining objections not raised below” may be outweighed by “the strong interest of the federal judiciary in maintaining the constitutional plan of separation of powers.” Id. (quoting Glidden Co. v. Zdanok, 370 U.S. 530, 536 (1962) (plurality opinion)).
Second, the IRS argues that the Kuretskis waived any pre-payment challenge to the constitutionality of the Tax Court proceedings by seeking relief in the Tax Court in the first place. Although Article III confers on litigants a “personal right” to “have claims decided before judges who are free from potential domination by other branches of government,” that right is “subject to waiver, just as are other personal constitutional rights that dictate the procedures by which civil and criminal matters must be tried.” Commodity Futures Trading Comm‘n v. Schor, 478 U.S. 833, 848-49 (1986) (internal quotation marks omitted). But aside from any “personal right” that they assert, the Kuretskis’ arguments also implicate a separate interest protected by Article III: “the role of the independent judiciary within the constitutional scheme of tripartite government.” Id. at 848 (quoting Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 583 (1985)). And when such a “structural principle is implicated in a given case, ... notions of consent and waiver cannot be dispositive because the limitations serve institutional interests that the parties cannot be expected to protect.” Id. at 850-51. In Schor, the Supreme Court thus found that the respondent‘s decision to seek relief in the CFTC rather than in federal court amounted to a waiver of his claim under Article III of a “personal right” to “an impartial and independent federal adjudication,” id. at 848, but that he did not (and could not) thereby waive his “structural” claim, id. at 850-51.
The IRS errs in resting its waiver argument on McElrath v. United States, 102 U.S. 426 (1880). In McElrath, a retired Marine Corps officer sued the government in the Court of Claims for back pay, and the government asserted a counterclaim on the ground that the officer had received more than he was entitled to be paid. Id. at 435-36. After the Court of Claims rendered judgment in favor of the government on its counterclaim, the officer ar-
Finally, the IRS asserts that the Kuretskis lack Article III standing to challenge the presidential removal of Tax Court judges. To establish Article III standing, the Kuretskis must show (i) that they have suffered an “injury in fact,” (ii) that the injury is “fairly traceable to the challenged action” of the IRS, and (iii) that it is “likely ... that the injury will be redressed by a favorable decision.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992) (alteration, ellipsis, and internal quotation marks omitted). The proposed levy on the Kuretskis’ home undoubtedly qualifies as an “injury in fact” that is fairly traceable to the IRS, but the IRS argues that the Kuretskis fail to meet the redressability requirement. This Court, however, could grant the Kuretskis adequate redress by striking down
B.
In support of their argument that presidential removal of Tax Court judges violates the constitutional separation of powers, the Kuretskis’ “primary position” is that the Tax Court exercises “judicial power” under Article III of the Constitution. In the alternative, the Kuretskis contend that the Tax Court is part of the Legislative Branch. Either way, the Kuretskis argue, presidential removal of Tax Court judges “leaves those judges in an unconstitutional bind” because they “must fear removal from an actor in another branch.” Pet‘rs’ Br. 11, 33.
The Kuretskis’ challenge rests on the assumption that “interbranch removal” is unconstitutional under Bowsher v. Synar, 478 U.S. 714 (1986). “Nothing in Bowsher, however, suggests that one Branch may never exercise removal power, however limited, over members of another Branch.” Mistretta v. United States, 488 U.S. 361, 411 n. 35 (1989).
1.
The Kuretskis’ principal submission is that Tax Court judges exercise the judicial power of the United States under Article III of the Constitution. We disagree.
Article III prescribes that the “judicial Power of the United States” is “vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.”
“Article III could neither serve its purpose in the system of checks and balances nor preserve the integrity of judicial decisionmaking if the other branches of the Federal Government could confer the Government‘s ‘judicial Power’ on entities outside Article III.” Stern, 131 S. Ct. at 2609. As a result, “[w]hen a suit is made of ‘the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,’ and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.” Id. (quoting N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982) (Rehnquist, J., concurring in the judgment)).
At the same time, the Supreme Court has recognized a “category of cases involving ‘public rights‘” that Congress can constitutionally assign to non-Article III tribunals. Id. at 2610 (quoting Northern Pipeline, 458 U.S. at 67 (plurality opinion)). The “public rights” category comprises disputes that “could be conclusively determined by the Executive and Legislative Branches” without judicial intervention. Thomas, 473 U.S. at 589 (quoting Northern Pipeline, 458 U.S. at 68). The “public rights” doctrine reflects simply a pragmatic understanding that, when Congress selects a quasi-judicial method of resolving matters that could be decided with no judicial review, “the danger of encroaching on the judicial powers is reduced.” Id.
Although the precise contours of the “public rights” doctrine are not fully formed, see Stern, 131 S. Ct. at 2610; Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 51 n. 8 (1989), it is “settled” that the category of public rights includes matters of “internal revenue” and “taxation,” at least at the pre-collection stage. Atlas Roofing Co. v. Occupational Safety & Health Review Comm‘n, 430 U.S. 442, 450-51 & nn. 8-9 (1977); see Crowell v. Benson, 285 U.S. 22, 50-51 (1932); Murray‘s Lessee v. Hoboken Land & Improvement Co., 59 U.S. 272, 284 (1856).
Congress undisputedly exercised that option when it initially established the Tax Court as an Executive Branch agency rather than an Article III tribunal. See
The Supreme Court‘s decision in Freytag v. Commissioner, however, adds a wrinkle to what would otherwise be a straightforward analysis. The dispute in Freytag concerned a statute allowing the Chief Judge of the Tax Court to appoint “special trial judges” and assign certain cases to them. See
The Kuretskis rely substantially on the Freytag majority‘s holding that the Tax Court is a “Court of Law.” That holding, however, does not call into question the constitutionality of the President‘s removal power over Tax Court judges under
To be sure, the Freytag Court observed that the Tax Court “exercises a portion of the judicial power of the United States.” Freytag, 501 U.S. at 891. That statement, if considered in isolation, could be construed to suggest that Tax Court judges exercise Article III powers. But the Freytag Court clarified that “non-Article III tribunals ... exercise the judicial power of the United States,” such that “the judicial power of the United States is not limited to the judicial power defined under Article III.” Id. at 889 (citing Am. Ins. Co. v. Canter, 26 U.S. 511, 546 (1828)). The Court therefore used the phrase “judicial power” in “an enlarged sense,” not in the particular sense employed by Article III. See Murray‘s Lessee, 59 U.S. at 280 (“judicial act” in “an enlarged sense” encompasses “all those administrative duties the performance of which involves an inquiry into the existence of facts and the application to them of rules of law“); cf. City of Arlington v. FCC, 133 S. Ct. 1863, 1877-78 (2013) (Roberts, C.J., dissenting) (administrative agencies exercise “judicial power” when they “adjudicat[e] enforcement actions and impos[e] sanctions on those found to have violated their rules“). As another court of appeals has explained, a “central lesson from Freytag is that adjudication by adversarial proceedings can exist outside the context of Article III.” S.C. State Ports Auth. v. Fed. Mar. Comm‘n, 243 F.3d 165, 171 (4th Cir. 2001), aff‘d, 535 U.S. 743 (2002); see Freytag, 501 U.S. at 891 (Tax Court is “an adjudicative body“). The Freytag Court, after all, repeatedly compared the Tax Court to the non-Article III territorial courts. See id. at 889-90, 892.
The Kuretskis argue that the precedents allowing for presidential removal of territorial judges have little bearing on their separation-of-powers argument because “territorial courts do not exercise the judicial power of the United States.” Pet‘rs’ Br. 40-41. It is true that territorial courts do not exercise “the judicial power of the United States” in the particular sense addressed by Article III. See McAllister, 141 U.S. at 190. But the Freytag Court suggests that territorial courts exercise “judicial power” in the same overarching sense in which the Tax Court exercises “judicial power,” such that the territorial courts and the Tax Court are similarly situated for purposes of the Appointments Clause. See Freytag, 501 U.S. at 889-90 (territorial court is “one of the ‘Courts of Law‘” under Appointments Clause). We see no reason why the territorial courts and the Tax Court are not also similarly situated for purposes of presidential removal. Accordingly, we conclude that the Tax Court‘s status as a “Court of Law“—and its exercise of “judicial power“—for Appointments Clause purposes under Freytag casts no doubt on the constitutionality
2.
Even if the Tax Court does not exercise Article III judicial power, the Kuretskis argue as a fallback position that the Tax Court functions as part of the Article I Legislative Branch. Understandably, the Kuretskis make no attempt to explain how the Tax Court could conceivably be considered a legislative body or conceivably be seen to possess legislative power. Instead, the Kuretskis suggest that the Tax Court may fall within the Legislative Branch because it constitutes “an Article I legislative court.” We have no disagreement with the characterization of the Tax Court as an “Article I legislative court.” Congress, as explained, amended
The Constitution itself “nowhere makes reference to ‘legislative courts‘“; the “concept of a legislative court” instead “derives from the opinion of Chief Justice Marshall in American Insurance Co. v. Canter.” Glidden, 370 U.S. at 543-44 (citing Canter, 26 U.S. 511). In Canter, Chief Justice Marshall used the phrase “legislative Courts” to describe the territorial courts of Florida, which at the time had yet to be admitted to the Union as a state. “The jurisdiction with which [the Florida territorial courts] are invested,” according to Chief Justice Marshall, “is not a part of that judicial power which is defined in the 3d article of the Constitution, but is conferred by Congress, in the execution of those general powers which that body possesses over the territories of the United States.” Canter, 26 U.S. at 546; cf.
A tribunal constitutes a “legislative court” if its power “is not conferred by the third article of the Constitution, but by Congress in the execution of other provisions of that instrument.” Williams v. United States, 289 U.S. 553, 565-66 (1933). Congress‘s authority to create the Tax Court stems from two clauses in Article I, Section 8 of the Constitution: the Taxing and Spending Clause and the Necessary and Proper Clause. See
3.
We have explained that Tax Court judges do not exercise the “judicial power of the United States” pursuant to Article III. We have also explained that Congress‘s establishment of the Tax Court as an Article I legislative court did not transfer the Tax Court to the Legislative Branch. It follows that the Tax Court exercises its authority as part of the Executive Branch.
That conclusion is fully consistent with Freytag. The Freytag majority rejected the argument that the Tax Court is an executive “Department” for purposes of the Appointments Clause. See Freytag, 501 U.S. at 888. But the majority also made clear that an entity can be a part of the Executive Branch without being an executive “Department.” See id. at 885 (“We cannot accept the Commissioner‘s assumption that every part of the Executive Branch is a department, the head of which is eligible to receive the appointment power.“); id. at 886 (“a holding that every organ in the Executive Branch is a department would multiply indefinitely the number of actors eligible to appoint“). One of our sister circuits thus understands Freytag to hold that “the Tax Court is a Court of Law despite being part of the Executive Branch.” S.C. State Ports Auth., 243 F.3d at 171 (emphasis added).
The Freytag majority also observed that the Tax Court “remains independent of the Executive ... Branch[],” and in that sense exercises something other than “executive” power. Freytag, 501 U.S. at 891. We understand that statement to describe the Tax Court‘s functional independence rather than to speak to its constitutional status. The Supreme Court has used similar language to describe “quasilegislative” and “quasijudicial” agencies such as the Federal Trade Commission, noting that such agencies are “wholly disconnected from the executive department” and that their members must “act in discharge of their duties independently of executive control.” Humphrey‘s Ex‘r v. United States, 295 U.S. 602, 629-30 (1935). While “independent,” members of such agencies can be removed by the President for cause. See Fed. Mar. Comm‘n v. S.C. State Ports Auth., 535 U.S. 743, 773 (2002)
In relevant respects, the constitutional status of the Tax Court mirrors that of the Court of Appeals for the Armed Forces. The statutes establishing the status of the two courts precisely parallel one another. Each provides that the respective court is a “court of record” “established under article I of the Constitution.”
Congress did not, however, move the Tax Court outside the Executive Branch altogether. Indeed, the Supreme Court has recognized that the Court of Appeals for the Armed Forces is an “Executive Branch entity” and that its judges are “Executive officers.” Edmond v. United States, 520 U.S. 651, 664-65 (1997); see id. at
IV.
The Kuretskis raise a separate constitutional challenge to the IRS‘s procedure for collection-due-process hearings. That procedure, in the Kuretskis’ view, failed in their case to satisfy the requirements of the Fifth Amendment‘s Due Process Clause. We are unpersuaded.
“An essential principle of due process is that a deprivation of life, liberty, or property ‘be preceded by notice and opportunity for hearing appropriate to the nature of the case.‘” Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 542 (1985) (quoting Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 313 (1950)). The Kuretskis acknowledge that they received notice of the IRS‘s proposed levy and a hearing before the IRS settlement officer assigned to their case. The Kuretskis, however, have a “sneaking suspicion” that the decision to deny them a penalty abatement was “influenced” by the appeals team manager who supervised the settlement officer. Pet‘rs’ Br. 54. They argue that they should have been afforded an opportunity to comment on the settlement officer‘s written report to her appeals team manager or “some opportunity to interact” with the manager before he made a final decision to deny their abatement request. Id. at 56.
Assuming arguendo that the Due Process Clause generally requires the IRS to afford a taxpayer some manner of hearing before imposing a levy, see United States v. James Daniel Good Real Prop., 510 U.S. 43, 60-61 (1993), there is no basis for recognizing a constitutional entitlement for taxpayers to comment on an IRS settlement officer‘s report to her appeals team manager or present their case directly to the appeals team manager. The Kuretskis rely on Ballard v. Commissioner, 544 U.S. 40 (2005), which holds that the Tax Court must disclose the reports of special trial judges who serve as factfinders in cases in which Tax Court judges make the ultimate decision. But the Court based its holding on its interpretation of the Tax Court Rules, see id. at 46-47 & n. 2, and “express[ed] no opinion” on whether “the Due Process Clause requires disclosure of a trial judge‘s factfindings that have operative weight in a court‘s final decision,” id. at 64-65.
In Gottlieb v. Pena, 41 F.3d 730 (D.C. Cir. 1994), we rejected a due process claim similar to the one advanced by the Kuretskis. There, a Coast Guard lieutenant commander applied to a Coast Guard board for correction of his military record, and the board heard evidence before submitting a recommended decision to the Secretary of Transportation. The Secretary was the final decisionmaker, however, and the plaintiff had no opportunity to examine the board‘s initial decision or make a submission to the Secretary in light of the board‘s recommendation. We held that the Coast Guard‘s procedures did not violate the Fifth Amendment Due Process Clause, concluding that the lieutenant commander had no “entitle[ment] to input or process past the first ‘tier’ and cannot force the agency to open its essentially deliberative process.” Id. at 737 (citing Morgan v. United States, 298 U.S. 468, 481 (1936)); see also Morgan, 298 U.S. at 481 (“[e]vidence may be taken by an examiner” and “may be sifted and analyzed by competent subordinates,” so long as “the officer who makes the determinations ... consider[s] and appraise[s] the evidence which justifies them“).
*
For the foregoing reasons, we affirm the decision of the Tax Court.
So ordered.