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How Will Brett Kavanaugh Rule on Taxes at Supreme Court?


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7/15/2018
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How Will Brett Kavanaugh Rule on Taxes at Supreme Court?

On July 9, 2018, President Donald Trump nominated Brett Kavanaugh to replace retiring Justice Anthony Kennedy as an Associate Justice on the Supreme Court of the United States.

Kavanaugh, 53, previously worked as George W. Bush’s White House staff secretary and worked for Bush during the 2000 Florida vote recount.  He clerked for Justice Anthony Kennedy early in his career.  As an attorney working for Solicitor General Ken Starr, Kavanaugh played a lead role in drafting the Starr Report, which urged the impeachment of President Bill Clinton.  He has been on the U.S. Court of Appeals for the District of Columbia Circuit since 2006.  He is a prolific jurist with originalist and textualist views who has been praised by the right as a good choice and who the left has decried as a terrible choice.  In particular, the left appears uncomfortable with his views on the independence of the executive branch, and his expressed belief that a sitting president should be immune from civil attacks. 

In 2009, Kavanaugh wrote an article for the Minnesota Law Review in which he argued that Congress should exempt U.S. presidents from civil lawsuits while in office because such lawsuits could be "time-consuming and distracting" for the president and would thus "ill serve the public interest, especially in times of financial or national security crisis."  Kavanaugh argued that if a president "does something dastardly,” that president may be impeached by the House of Representatives, convicted by the Senate, and criminally prosecuted after leaving office.  In light of the Mueller investigation, those on the left, like Chuck Schumer, have expressed concerns over this viewpoint.  But, when balanced against Kavanaugh’s role impeaching President Bill Clinton, while Kavanaugh dislikes subjecting presidents to repeated civil attacks, he clearly is also a believer in the role of a special counsel and utilizing impeachment as a constitutional check on executive power.

In any event, let’s look at what his views on taxes are and how his appointment will impact the tax landscape.

Tax Challenges by Taxpayers

Kavanaugh’s legal position is that challenges to tax statutes and regulations are limited to responding to deficiency suits or making a formal claim for refund and raising the constitutional challenge in that action.  If you get a notice, you have to respond and litigate through formal channels and exhaust judicial remedies, or pay to stave off snowballing interest, while your legal case proceeds through the courts on a claim for refund. 

“If Kavanaugh’s views prevailed on the Supreme Court, taxpayers could not challenge tax regulations until they were enforced, because Kavanaugh believes Section 7421 forecloses that type of challenge,” said Andy Grewal, a professor at the University of Iowa College of Law, referring to the nominee’s view on the Anti-Injunction Act.

In Seven-Sky v. Holder, No. 11-5047 (D.C. Cir. November 8, 2011), Kavanaugh held that the Anti-Injunction Act would bar the high court from ruling on a challenged to the Affordable Care Act or on any other tax imposed by Congress.  The Circuit Court was faced with arguments that the “individual mandate” was unconstitutional.

Kavanaugh is a proponent of “separation of powers” and allowing the legislature to act; thus, he declined hearing a challenge to the ACA head-on, observing “we’re courts of judicial restraint. It’s a delicate act to declare an Act of Congress unconstitutional.”  In short, the Court does not have a “veto” and should not strike an Act of Congress until it is implemented and has a chance to see the light of day and play out as it is implemented and applied. 

Certainly, while reasonable minds can differ on the wisdom of the healthcare bill, the debate came down to whether the penalty was a “tax” or a “fine.”  The ACA could certainly legally be passed as a Tax under Art. I, Sec. 8, Cls. 3, but could not legally be passed (as it was written) if it is really a fine/penalty that restricts or restrains trade and competition between states in violation of the Commerce Clause. 

Kavanaugh also foreshadowed Chief Justice Roberts’ decisive opinion in National federation of Independent Business v. Sebelius, stating that a “minor tweak to the current statutory language would definitively establish the law’s constitutionality under the Taxing Clause (and thereby moot any need to consider the Commerce Clause).”

“Under the Anti-Injunction Act, a taxpayer seeking to challenge a tax law must first pay the disputed tax and then bring a refund suit, at which time the courts will consider the taxpayer’s legal arguments. Or, a taxpayer may raise legal arguments in defending against an IRS enforcement action. But a taxpayer may not bring a pre-enforcement suit,” he said. The challenge to Obamacare was a “pre-enforcement suit” and was thus barred, he said.

Kavanaugh also determined that the Anti-Injunction Act would bar rulings challenging tax statutes and regulations before they are enforced.  In both We the People Foundation v. United States and Florida Banker Assn. v. United States, he wrote the majority opinion in favor of the government.  In short, the Anti-Injunction Act prohibits restraints on the Government’s collection of taxes.  The Act says that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” 26 U.S.C. § 7421(a).  The Act thereby “protects the Government’s ability to collect a consistent stream of revenue.” National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566, 2582, slip op. at 11 (2012). 

So, on a court where Kavanaugh has a seat, you must wait to line up a “test case” to challenge a particular legislative enactment rather than making a preemptive strike on an offensive law by attempting to get an injunction.

“Kavanaugh has expressed reservations over Chevron deference,” Grewal, a professor at the University of Iowa College of Law said. “That means that once a taxpayer is able to challenge a tax regulation, Kavanaugh may be more inclined to strike that regulation down than other judges.”

Position on “Chevron” Deference to Administrative Agency Decisions

Brett Kavanaugh is a proponent of “separation of powers,” but does not champion deference to administrative agencies which do not have the status of a “separate and equal” branch of the government. 

Kavanaugh taught full-term courses on Separation of Powers at Harvard Law School from 2008 to 2015, which goes to show how important this issue is to the pending Associate Justice.

Where Do Administrative Agencies Fall Under the U.S. Legal System?

Our three branches of government come from the first three articles of the Constitution: Art. 1, setting up the legislature; Art. 2, setting up the executive; and Art. 3, setting up the judiciary.  “Separation of Powers” is a core tenant of Federalism which seeks to avoid a centralization of government power, but instead divides government duties and sets up various “checks and balances” to further limit each branch’s power.  Some of these “checks and balances” are the presidential veto, Congress’s ability to override a veto with a 2/3 vote, Presidential nomination of federal justices, Senate’s confirmation role for federal judges, the impeachment power of Congress, Judicial review of the constitutionality of legislative acts “as applied,” and Congressional ability to enact statutes that supersede existing caselaw and become the law of the land.

Because of the lack of “checks and balances” to their power, many constitutional scholars refer to administrative agencies as the “unchecked Fourth Branch of Government.”  This is, in part, due to how most administrative agencies operate.

In an administrative action, the administrative agency is represented by the State (Attorney General’s Office or U.S. Attorney’s Office), whose client is the agency that took legislative action by penning the regulations, and ruled upon by an Administrative Law Judge, usually hailing from the AG/U.S. Atty’s Office or the in-house legal group at the administration, and the Director of the Agency usually has executive veto power over the Judge’s legal determination of the case.  Thus, agency action legislates, judges, and executes the “law” that it writes through regulations that carry the force and power of law, making it judge, jury and executioner.  In The Federalist No. 47, at 298, James Madison called such an accumulation of power the “very definition of tyranny.”

Proponents of administrative agencies laud their role as “regulators” of markets and industries that lack transparency and accountability absent oversight and regulatory enforcement.  These are policemen walking the streets with clubs and guns, with an ear to the street—whose very presence deters wrongdoing—and whose investigations are so feared that wrongdoers with skeletons in their closets change their ways for fear of having their bad deeds brought to light.  Justice Louis Brandeis famously said, “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

Justice Stephen Breyer said agencies “come in different shapes and sizes, and they employ millions of government officials and ordinary workers” to deal with issues that include “taxes, welfare, Social Security, medicine, pharmaceutical drugs, education, highways, railroads, electricity, natural gas, stocks and bonds, banking, medical care, public health, safety, the environment, fair employment practices, consumer protection, and much else….”

Justice Breyer noted that “Political appointees, often not experts, are normally responsible for managing agencies and determining policy. And policy often reflects political, not simply “scientific” considerations. Agency decisions will also occasionally reflect “tunnel vision,” an agency’s supreme confidence in the importance of its own mission to the point where it leaves common sense aside…” Stephen Breyer, The Executive Branch, Administrative Action, and Comparative Expertise, 32 Cardozo L. Rev. 2189, 2190–91 (2011). 

In turn, Congress gives a blank check to agencies, enacting “vast and vaguely worded legislation … grant[ing] broad discretion to regulatory agencies.” James Gattuso & Diane Katz, Red Tape Rising: Five Years of Regulatory Expansion, Heritage Foundation Backgrounder No. 2895, March 26, 2014, available at http://www.heritage.org/research/reports/2014/03/red-tape-rising-five-years-of-regulatory-expansion.

What Are Brett Kavanaugh’s Views on Agency Deference?

Brett Kavanaugh has been vocal in saying that he does not believe administrative agencies are entitled to deference just because Congress has failed to put meat on the bones in the authorizing statute.  In particular, Kavanaugh has struck down or sided against the EPA’s interpretation or enforcement of its own regulations on emissions in a few different cases. In one case, he wrote, "however much we might sympathize or agree with EPA's policy objectives, EPA may act only within the boundaries of its statutory authority. Here, EPA exceeded that authority." Mexichem Fluor, Inc. v. EPA, (D.C. Cir. Aug. 8, 2017).

Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) was a landmark case in which the United States Supreme Court set forth the legal test for determining whether to grant deference to a government agency's interpretation of a statute which it administers.  Justice John Paul Stevens explained that “[t]he power of an administrative agency to administer a congressionally created program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” Chevron at 843. 

Under Chevron, an administrative action that falls squarely under the statutory mandate must be deferred to, and an action that conflicts must be struck down.  This is not controversial.  The controversial part of the doctrine is that the Court also will defer to the administrative agency decision where the legislative mandate is “vague or ambiguous.”  According to Justice John Paul Stevens, this is necessary since Congress lacks the specialized knowledge to “fill in the gaps” and agency rulemaking simply flows from the statutory mandate that the agency regulate.  However, this is an all or nothing approach and causes all challenges to administrative action to be fought out on the grounds of whether the rulemaking is “contrary to legislative mandate”— a nearly impossible standard for litigants – and procedurally an outcome determinative solution to the problem.

Various justices at various times have questioned the wisdom of the Chevron Doctrine.  Justice Samuel Alito in one case decried the “aggrandizement of the power of administrative agencies.”  In the same case, Justice Clarence Thomas railed against the unchecked nature of administrative action, “[t]his line of precedents undermines our obligation to provide a judicial check on the other branches, and it subjects regulated parties to precisely the abuses that the Framers sought to prevent.” Perez v. Mortgage Bankers Association, 135 S. Ct. 1199, 1210 (2015) (Alito, J., concurring)Id. at 1213 (Thomas, J., concurring).

"I would expect him to approach Chevron the way the chief justice does, which is to try and cabin its scope, so that agencies get deference in a smaller category of cases, and only when there is no doubt Congress expressly intended to leave the matter to the agency's discretion," said Jody Freeman, a law professor at Harvard Law School and a former climate adviser to President Obama.

https://www.forbes.com/sites/kellyphillipserb/2018/07/10/supreme-court-nominee-brett-kavanaugh-penned-healthcare-dissent-focused-on-tax/

http://www.dontmesswithtaxes.com/2018/07/scotus-nominee-brett-kavanaughs-judicial-take-on-taxes.html

https://taxfoundation.org/potential-supreme-court-nominees-taxpayer-rights-state-taxes-interstate-commerce/

https://www.bna.com/court-pick-kavanaughs-n73014477298/

https://www.washingtontimes.com/news/2018/jul/12/judge-kavanaugh-and-the-chevron-deference/

https://www.eenews.net/stories/1060088675



Category: Tax Law


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