American Institute of Certifi v. IRS

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 5, 2017 Decided August 14, 2018
No. 16-5256
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,
APPELLANT
v.
INTERNAL REVENUE SERVICE AND JOHN A. KOSKINEN, IN HIS
OFFICIAL CAPACITY AS COMMISSIONER OF INTERNAL REVENUE
SERVICE,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 1:14-cv-01190)
Douglas R. Cox argued the cause for appellant. With him
on the briefs were Russell B. Balikian and Matthew S. Rozen.
Gilbert S. Rothenberg, Attorney, U.S. Department of
Justice, argued the cause for appellees. With him on the brief
were Francesca Ugolini, Jonathan S. Cohen, and Bethany B.
Hauser, Attorneys.
Noel L. Allen was on the brief for amicus curiae The
National Association of State Boards of Accountancy in
support of neither party.
2
Before: ROGERS and GRIFFITH, Circuit Judges, and
GINSBURG, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
GINSBURG.
Opinion concurring in part and dissenting in part filed by
Circuit Judge GRIFFITH.
GINSBURG, Senior Circuit Judge: This case concerns a
longstanding Internal Revenue Service effort to address
perceived problems in the market for tax preparation services.
In 2011, the IRS adopted a sweeping rule that would have
regulated all tax preparers for the first time. That rule was
challenged and the bulk of it was enjoined by the district court
in Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. 2013) (Loving I),
vacated in part, 920 F. Supp. 2d 108 (D.D.C. 2013) (Loving
II), affirmed, 742 F.3d 1013 (D.C. Cir. 2014) (Loving III).
In the wake of the Loving litigation, the IRS instituted a
voluntary scheme known as the Annual Filing Season Program.
See REV. PROC. 2014-42, 2014-29 I.R.B. 192 (2014). The
Program allows certain tax preparers, known as “unenrolled
preparers” to distinguish them from those “enrolled” to practice
before the IRS, to get a limited right to represent taxpayers in
IRS audits of tax returns. See id. § 2.
The American Institute of Certified Public Accountants
(AICPA) challenged the Program in district court, asserting
violations of the Administrative Procedure Act (APA). The
district court initially dismissed the case for lack of
constitutional standing. Am. Inst. of Cert. Pub. Accnts. v. IRS,
No. 14-1190, 2014 WL 5585334 (D.D.C. Oct. 27, 2014)
(AICPA I). We reversed. Am. Inst. of Cert. Pub. Accnts. v. IRS,
804 F.3d 1193 (D.C. Cir. 2015) (AICPA II). On remand the
3
IRS moved for judgment on the pleadings, arguing that the
AICPA lacked statutory standing, and the district court granted
the motion. Am. Inst. of Cert. Pub. Accnts. v. IRS, 199 F. Supp.
3d 55 (D.D.C. 2016) (AICPA III). The AICPA now appeals.
We reverse, concluding the AICPA has constitutional and
statutory standing to challenge the validity of the Program
because its members employ unenrolled preparers. Continuing
to the merits, we hold the Program does not violate the APA in
any of the ways the AICPA alleges.
I. Background
There are four categories of persons who may assist
taxpayers with their returns: attorneys, certified public
accountants (CPAs), IRS-credentialed preparers called
“enrolled agents,” and unenrolled preparers. AICPA III, 199 F.
Supp. 3d at 57. Unenrolled preparers were not subject to any
licensing requirements until 2011, when the IRS adopted a rule
requiring them to become “registered tax return preparers,”
which entailed paying a fee, passing “a one-time competency
exam,” and completing a prescribed course of continuing
education each year. See Regulations Governing Practice
Before the Internal Revenue Service, 76 Fed. Reg. 32,286,
32,287 (June 3, 2011) (final rule); 31 C.F.R. §§ 10.4(c),
10.5(b)-(c), 10.6(e)(3) (2012).
The district court invalidated that rule in Loving I because
the IRS lacked statutory authority to regulate unenrolled
preparers. 917 F. Supp. 2d at 73-79. That court enjoined
enforcement of the rule, id. at 80-81, but stayed the injunction
in part to allow the IRS to continue operating “its testing and
continuing-education centers” as long as the IRS did not
require any tax preparer to take a test, enroll in continuing
education, or pay a fee for either of those services. Loving II,
4
920 F. Supp. 2d at 112. We affirmed the judgment of the
district court, Loving III, 742 F.3d 1013, and the IRS opted to
continue with testing and continuing education as parts of a
voluntary Annual Filing Season Program.
The IRS established the Program by issuing Revenue
Procedure 2014-42, 2014-29 I.R.B. 192 (2014), which it did
without notice and comment. Although open to all categories
of tax preparers, the program is designed for unenrolled
preparers.
The Program grants an annual “Record of Completion” to
any participant who has obtained a preparer tax identification
number, taken the annual “federal tax filing season refresher
course,” passed a comprehension test, completed a minimum
of eighteen hours of continuing education, and “consent[ed] to
be subject to the duties and restrictions relating to practice
before the IRS in subpart B and section 10.51 of Circular 230
for the entire period covered by the Record of Completion.” Id.
§ 4.05(1)-(4).
The IRS offers two incentives to participate in the
Program. First, the IRS lists unenrolled agents with a Record
of Completion in its online directory of tax preparers alongside
attorneys, CPAs, and enrolled agents. Second, the IRS gives
them the “limited practice right” to represent a taxpayer in the
initial stages of the audit of a return he or she prepared; for this
the unenrolled agent must have a Record of Completion for
both the year of the return and the year the IRS initiated the
audit. Id. § 6. Before the Program was established, all
unenrolled agents had this limited practice right.
The AICPA brought a suit challenging the authority of the
IRS to conduct the Program. The district court initially
dismissed the case on the ground that the AICPA lacked
5
constitutional standing. AICPA I, 2014 WL 5585334. We
reversed and remanded the case to the district court, holding
the AICPA had constitutional standing as the representative of
competitors to unenrolled agents with a Record of Completion.
AICPA II, 804 F.3d 1193. We did not address the other
standing theories advanced by the AICPA. See id. at 1199.
On remand the IRS argued the AICPA did not have
statutory standing because it did not come within the zone of
interests protected or regulated by the relevant statute. The
district court agreed, holding: (i) “the competitive-harm-by-
brand-dilution injury is . . . the only relevant ‘grievance’ for
determining whether [the] AICPA satisfies the zone-of-
interests test,” AICPA III, 199 F. Supp. 3d at 64; (ii) the
relevant statute for the zone of interest test is the substantive
statute under which the IRS claims authority, viz., 31 U.S.C. §
330(a) and portions of § 330(b), rather than the APA, AICPA
III, 199 F. Supp. 3d at 66; (iii) the Congress enacted §§ 330(a)
and (b) “to protect consumers in need of tax services,” id. at
67; and (iv) the AICPA is not a suitable challenger for APA
purposes because its interest “in avoiding intensified
competition as a result of the [challenged regulation]” sets it on
a “collision course with Congress’s interest in safeguarding
consumers.” Id. at 69 (internal quotation marks omitted). It
therefore entered judgment on the pleadings for the IRS and
dismissed the case for want of statutory standing pursuant to
Federal Rule of Civil Procedure 12(c). Id. at 73.
II. Analysis
We review the judgment of the district court de novo. Fox
v. District of Columbia, 794 F.3d 25, 29 (D.C. Cir. 2015). As
explained below, we address both the AICPA’s standing to
bring this challenge and the underlying merits.
6
A. Standing
Because the AICPA is an association, its standing turns
upon whether at least one of its members has the requisite
standing “to sue in her or his own right.” AICPA II, 804 F.3d at
1197 (quoting Am. Library Ass’n v. FCC, 401 F.3d 489, 492
(D.C. Cir. 2005)). The AICPA asserts it has standing for four
independent reasons, any one of which is sufficient to satisfy
the constitutional and statutory standing tests.
First, the AICPA argues its members suffer harm as
competitors because the Program created a new credential, the
Record of Completion, that “confuses” consumers and causes
them to patronize unenrolled preparers instead of licensed
CPAs. Second, the AICPA argues its members suffer harm as
employers because the Program withdrew the limited practice
right unenrolled preparers had previously enjoyed and
therefore limits how its members may use the unenrolled
preparers in their employ. Third, the AICPA argues its
members suffer harm as employers because the Program
imposed new supervisory requirements on firms that employ
unenrolled preparers who hold a Record of Completion.
Fourth, the AICPA argues its members incur compliance costs
to the extent they absorb the time and cost of unenrolled
preparers in their employ who choose to participate in the
Program.
The IRS no longer disputes that the AICPA has
constitutional standing based upon its competitive injury. It
argues instead the AICPA cannot establish statutory standing
on any of its proffered theories because neither it nor its
members are regulated or protected by the applicable statute.
As explained below, we think it clear that a member of the
7
AICPA incurs a supervisory burden that confers both
constitutional and statutory standing. 1
1. Constitutional Standing
Constitutional standing is “an indispensable part of the
plaintiff’s case” that must persist through the “successive
stages of the litigation.” Lujan v. Defenders of Wildlife, 504
U.S. 555, 561 (1992); see Univ. Med. Ctr. of S. Nevada v.
Shalala, 173 F.3d 438, 441-42 (D.C. Cir. 1999) (assessing
redressability at the time of the decision under review). In
order to satisfy “the irreducible constitutional minimum of
standing,” a party must (1) have suffered an injury in fact, (2)
that is fairly traceable to the challenged government action, and
(3) will likely be redressed by a favorable decision. Lujan, 504
U.S. at 560.
Some members of the AICPA are injured by the Program
because it imposes new supervisory responsibilities on them.
As explained earlier, the Program conditions receipt of a
Record of Completion upon the unenrolled preparer’s “consent
to be subject to the duties and restrictions relating to practice
before the IRS” under subpart B of Circular 230. REV. PROC.
1
It is well-settled in this circuit that “the injury that supplies
constitutional standing must be the same as the injury within the
requisite ‘zone of interests’ for purposes of [statutory] standing.”
Mountain States Legal Found. v. Glickman, 92 F.3d 1228, 1232
(D.C. Cir. 1996). Although we have previously concluded the
AICPA has constitutional standing as a competitor, see AICPA II,
804 F.3d at 1197-98, we focus here upon a different theory of
standing because it clearly is sufficient to confer both constitutional
and statutory standing.
8
2014-42 § 4.05(4). Subpart B regulates conflicts of interest,
fees, candor before the IRS, and competence. See 31 C.F.R. §§
10.20-.38. In effect, the Program extends the scope of Circular
230 to participating unenrolled preparers, including those
employed by members of the AICPA.
The expanded coverage of Circular 230 triggers another
provision in the Circular that applies to supervisors, including
members of the AICPA:
Any individual subject to the provisions of [Circular
230] who has ... principal authority and responsibility
for overseeing a firm’s practice governed by [Circular
230], ... must take reasonable steps to ensure that the
firm has adequate procedures in effect for all members,
associates, and employees for purposes of complying
with subparts A, B, and C of [Circular 230], as
applicable.
31 C.F.R. § 10.36(a). By applying Circular 230 to a new class
of employees, the Program expands the supervisory
responsibilities of members of the AICPA. A supervisor who
fails to discharge that responsibility “will be subject to
discipline,” id. § 10.36(b), which can include censure,
suspension, disbarment, disqualification, or monetary
penalties.” Id. §§ 10.50(a)-(c).
In sum, the Program increases the supervisory
responsibility and hence the potential liability faced by
members of the AICPA. This is an actual and particularized
injury, fairly traceable to the Program, that could be redressed
by a favorable judicial decision. See Lujan, 504 U.S. at 560-
61.
9
2. Statutory Standing
The AICPA’s supervisory grievance also establishes its
statutory standing under the zone of interests test. That test
determines “who may invoke the cause of action in” a
particular statute. Lexmark Int’l, Inc. v. Static Control
Components, Inc., 134 S. Ct. 1377, 1388-89 (2014). “The
essential inquiry is whether Congress intended for a particular
class of plaintiffs to be relied upon to challenge agency
disregard of the law.” Clarke v. Sec. Indus. Ass’n, 479 U.S.
388, 399 (1987) (internal quotation marks omitted). “The test
is not meant to be especially demanding.” Id.
For any given grievance, we assess the zone of interests
using a three part test. We (a) identify the relevant statute, (b)
determine the zone of interests it implicates, and then (c) decide
whether the plaintiff’s grievance is “arguably within the zone
of interests to be protected or regulated by the statute.” Clarke,
479 U.S. at 396. This last part requires us to distinguish
between two distinct constituencies — protected parties, who
“have the incentive to ensure that the agency protects them to
the full extent intended by Congress,” and regulated parties,
who “have the incentive to guard against any administrative
attempt to impose a greater burden than that contemplated by
Congress.” Hazardous Waste Treatment Council v. Thomas,
885 F.2d 918, 922 (D.C. Cir. 1989) (citing Clarke, 479 U.S. at
397, 399). Our concern in this case is with the AICPA as a
regulated party.
The AICPA argues the agency failed to cite any statutory
authority for establishing the Program, so the APA is the
relevant statute here. This is clearly wrong. As the IRS points
out, the APA creates a cause of action for one “aggrieved by
agency action within the meaning of a relevant statute.” 5
10
U.S.C. § 702. The “relevant statute” is the statute defining “the
zone of interests to be protected or regulated,” Ass’n of Data
Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153
(1970), specifically, “the substantive provisions” of the
relevant statute, “the alleged violations of which serve as the
gravamen of the complaint,” Bennett v. Spear, 520 U.S. 154,
175 (1997). Not surprisingly, therefore, in all the zone of
interest decisions the AICPA cites, the relevant zone of interest
was defined by a substantive statute, not by the APA. See, e.g.,
Lexmark, 134 S. Ct. at 1387 (Lanham Act); Match-e-be-Nash-
She-Wish Band of Pottawatomi Indians v. Patchak, 567 U.S.
209, 224-25 (2012) (Indian Reorganization Act); Clarke, 479
U.S. at 755 (Bank Service Corporation Act); Amgen, Inc. v.
Smith, 357 F.3d 103, 109 (D.C. Cir. 2004) (Medicare Act). In
this case, the relevant statute, upon which both sides focus their
arguments, is 31 U.S.C. § 330(a):
[T]he Secretary of the Treasury may—
(1) regulate the practice of representatives
of persons before the Department of the
Treasury; and
(2) before admitting a representative to
practice, require that the representative
demonstrate—
(A) good character;
(B) good reputation;
(C) necessary qualifications to
enable the representative to
provide to persons valuable
service; and
(D) competency to advise and assist
persons in presenting their cases.
Having identified the relevant statute, we must next
determine the zone of interests it protects or regulates. The
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AICPA argues § 330(a) establishes three zones of interest, one
limiting IRS interference in the market for tax preparation
services, a second protecting taxpayers from harmful practices
by tax preparers, and a third regulating tax return preparers.
For its part, the IRS argues § 330(a) protects taxpayers but not
the firms who serve them.
We conclude § 330(a) protects taxpayers and, in so doing,
authorizes the Secretary of the Treasury (of which the IRS is a
component) to regulate the practice of agents who represent
taxpayers before the IRS. By its terms § 330(a) authorizes the
Secretary to regulate the qualifications of agents who practice
before it. Two of the required qualities – “good character” and
“good reputation” – bespeak a purpose to protect both the
agency and taxpayers from dishonest representatives. The
other two qualifications evince a clear purpose to protect
taxpayers by referencing the provision of “valuable service” to
taxpayers while “presenting their cases.” § 330(a)(2)(C)-(D).
Having determined the zone of interests protected or
regulated by § 330(a), we must decide whether the AICPA’s
injury falls within it. The AICPA argues its members are
injured by the Program directly in their capacity as employers
of unenrolled agents, who are now subject to, and can subject
their employers to sanctions for violations of, Circular 230.
The IRS argues AICPA members are not regulated by the
Program and therefore have no interest in avoiding regulation.
We disagree; as we explained when assessing the AICPA’s
constitutional standing, the Program regulates AICPA
members, albeit indirectly, by imposing supervisory duties on
them.
We conclude the grievance of AICPA members that
employ unenrolled preparers falls within the zone of interests
regulated by the statute. Like the trade association in
12
Hazardous Waste Treatment Council, the AICPA’s members
“have the incentive to guard against any administrative attempt
to impose a greater burden than that contemplated by
Congress.” Hazardous Waste Treatment Council, 885 F.2d at
922; see also Clarke, 479 U.S. at 399 (reviewing cases in which
a plaintiff had statutory standing because it was “itself the
subject of the contested regulatory action”). Here, the AICPA,
on behalf of its members, seeks to guard against what it views
as an expansion of the IRS’s regulatory authority and,
concomitantly, of AICPA members’ supervisory
responsibility, beyond the bounds authorized by the Congress.
Therefore, the AICPA’s grievance as employers is within the
zone of interests regulated by § 330(a). Because the AICPA
has a grievance that supplies both constitutional and statutory
standing, we need not consider its alternative argument that it
has statutory standing by virtue of its members’ grievance as
competitors to unenrolled preparers with a credential issued by
the IRS.
B. Merits
Having established that the AICPA has both constitutional
and statutory standing to challenge the Program, we must
decide whether to remand this case to the district court or to
proceed ourselves to the merits. Although our “general
practice” is to remand the case when we reverse the district
court’s denial of standing, it may be appropriate to address the
merits when the parties have “fully briefed the issue before this
court,” the merits “involve purely legal questions,” which we
would review de novo in a subsequent appeal, “[t]he district
court has no comparative advantage in reviewing the agency
action” for compliance with applicable law, and therefore “[a]
remand to the district court would be a waste of judicial
resources.” Mendoza v. Perez, 754 F.3d 1002, 1020 (D.C. Cir.
13
2014). Because each of these conditions obtains here, we
proceed to the merits of the dispute.
1. Statutory Authority
The AICPA argues the Program is beyond the statutory
authority delegated by the Congress to the Secretary of the
Treasury, and hence to the IRS. The IRS responds that the
Program is authorized by two statutes, 31 U.S.C. § 330(a) and
26 U.S.C. § 7803(a)(2)(A). As we have seen, § 330(a)
authorizes the IRS to “[r]egulate the practice of representatives
of persons before the [agency]” and to admit to practice only
individuals of good character and good reputation, who have
the necessary qualifications and competence. Section
7803(a)(2)(A) grants the Commissioner of the IRS “the power
to administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws or
related statutes,” which obviously includes § 330(a).
Consistent with its authority under § 330(a), and contrary
to the AICPA’s argument, the IRS uses the education, testing,
and certification portions of the Program to ensure the
unenrolled preparers who participate demonstrate the
qualifications and competence necessary to practice before the
agency. The Program specifies the education and testing
requirements in detail, including the subject matter, number of
instructional hours per year, form of testing, and minimum
passing grade. REV. PROC. 2014-42 § 4.05. These
requirements implement the IRS’s stated purpose of
encouraging unenrolled preparers “to complete continuing
education courses for the purpose of increasing their
knowledge of the law relevant to federal tax returns,” id. § 1,
consistent with its reasonable view that an “unenrolled tax
return preparer who successfully completes continuing
education courses related to federal tax law will generally have
14
a better understanding of the tax law necessary to represent a
taxpayer before the IRS during an examination” than one who
has not. Id. § 2.
The AICPA raises two objections. First, the AICPA
argues the Program relies upon § 330(a) for authority to
regulate the business of tax preparation, contrary to our
decision in Loving III, 742 F.3d at 1017-18. More specifically,
the AICPA suggests that making “the law relevant to federal
tax returns,” REV. PROC. 2014-42 § 1, a subject of continuing
education betrays an improper intent to regulate tax
preparation.
We see nothing in the Program that attempts to resurrect
regulations of the type enjoined in the Loving decisions.
Unenrolled tax preparers who participate in the program
“consent to be subject to the duties and restrictions relating to
practice before the IRS in [certain sections of] Circular 230,”
id. § 4.05(4); they do not consent to be governed by Circular
230 insofar as they are engaged in the business of tax
preparation.
The Program also ties violations of Circular 230 to the
limited practice right, not to the preparation of tax returns:
Record of Completion holders “who violate Circular 230
during the course of [their] representation [before the IRS]
will have their Record of Completion and ability to represent a
taxpayer before the IRS under this revenue procedure
revoked.” Id. § 7.01(2). When seen in this light, it is clear that
the participants’ commitment to follow Circular 230 is
coextensive with the IRS’s authority under § 330(a) to regulate
practice before it.
Second, the AICPA argues that because the IRS “initially
relied on Section 330 only as statutory authority ‘for Section
15
6’” of the Program, which permits limited representation by
holders of a Certificate of Completion, the IRS waived its
argument that § 330(a) authorizes any other aspect of the
Program. The AICPA relies solely upon a case in which we
held a petitioner had waived an argument that “was never
raised in either the rulemaking comments or the petitioners’
opening appellate brief.” Nat’l Ass’n of Home Builders v. EPA,
682 F.3d 1032, 1040 (D.C. Cir. 2012). There, the argument
was raised for the first time in the appellant’s reply brief. Id.
Here, the IRS raised its argument both before the district court,
where it argued – in the sentence immediately after the one to
which the AICPA refers - that “Section 330 provides sufficient
authority for the [Annual Filing Season Program],” Def.’s
Mem. Supp. Summ. J. at 17, AICPA III, No. 14-1190 (D.D.C.
Apr. 4, 2016), ECF No. 33, and in its opening brief on appeal.
Thus did it preserve the argument.
Another statute merits brief mention. The IRS also claims
authority for the Program under 26 U.S.C. § 7803(a)(2)(A),
which authorizes it to “administer ... the execution and
application of the internal revenue laws or related statutes.” Id.
We agree with the AICPA that this statute confers no additional
substantive authority. See New England Power Co. v. Fed.
Power Comm’n, 467 F.2d 425, 430-31 (D.C. Cir. 1972)
(addressing two statutes found to be “of an implementary rather
than substantive character” because they “merely augment
existing powers conferred upon the agency by Congress”).
Section 7803(a)(2)(A) is, however, relevant to the case because
it is what authorizes the IRS to publish the public directory of
individuals who hold a Record of Completion, an
administrative step analytically distinct from the creation of the
published data. See, e.g., Chem. Mfrs. Ass’n v. EPA, 28 F.3d
1259, 1263 (D.C. Cir. 1994) (distinguishing between the
classification of a substance as a carcinogen and the listing of
that classification in a publicly available agency database).
16
In sum, § 330(a) authorizes the IRS to establish and
operate the Program, and § 7803(a)(2)(A) authorizes the
agency to publish the results of the Program.
2. Procedural Requirements
Having determined that the IRS had the authority to adopt
the Program, we must next consider the AICPA’s contention
that the IRS did not follow the applicable procedure in issuing
the Revenue Procedure. The AICPA argues the Revenue
Procedure is a legislative rule and therefore had to be adopted
through notice and comment rulemaking pursuant to the APA,
5 U.S.C. § 553.
At the outset we note an agency action constitutes a
legislative rule only if “the agency action binds private parties
or the agency itself with the ‘force of law,’” Gen. Elec. Co. v.
EPA, 290 F.3d 377, 382 (D.C. Cir. 2002) (internal quotation
marks omitted) and “an agency pronouncement will be
considered binding as a practical matter if it either appears on
its face to be binding ... or is applied by the agency in a way
that indicates it is binding.” Id. at 383; cf. Chamber of
Commerce v. U.S. Dep’t of Labor, 174 F.3d 206 (D.C. Cir.
2007). In this case the Revenue Procedure and associated
Program do not bind unenrolled preparers at all; the Program
merely provides an opportunity for those unenrolled preparers
who both choose to participate and satisfy its requirements. Nor
does it impose any new or different requirement upon
supervisors or unenrolled agents; Circular 230 bound
17
supervisors and unenrolled agents before the Program took
effect and continues to bind them now. 2
Nonetheless the AICPA argues the Revenue Procedure is
a legislative rule because it withdraws a benefit, to wit, the right
of all unenrolled preparers to practice before the IRS, which
right had been created through notice and comment
rulemaking. True it is that a rule promulgated by notice and
comment ordinarily should be amended by notice and
comment. See, e.g., Consumer Energy Council of Am. v. FERC,
673 F.2d 425, 446 (D.C. Cir. 1982), aff’d, 463 U.S. 1216
(1983). It is also true that Loving enjoined the 2011 rule that
abolished the limited practice right, thereby restoring the status
quo ante. Yet, as the AICPA points out, the limited practice
afforded unenrolled preparers before 2011 was the product of
Revenue Procedure 81-38, which – like Revenue Procedure
2014-42 – was issued without notice and comment. 3
2
Our dissenting colleague claims the Program imposes significant
new obligations upon unenrolled preparers and their supervisors
because it makes subpart B of Circular 230, 31 C.F.R. Pt. 10,
applicable to unenrolled preparers not only when they practice before
the IRS, but also in “aspects of tax preparation.” Diss. at 6. On
closer inspection, however, it is clear that the Program does not
extend Circular 230 to cover the mere preparation of a tax return.
Subpart B concerns only “duties and restrictions relating to practice
before the Internal Revenue Service.” Because subpart B addresses
only practice before the IRS, an unenrolled agent’s agreement to be
subject to subpart B “as applicable” does not extend Circular 230 to
the preparation of a tax return. As the IRS stated in its brief, “the
program does not attempt to regulate tax-return preparers along the
lines of the invalidated 2011 regulations.” IRS Br. at 56.
3
Our dissenting colleague would hold the Program could be adopted
only after notice and comment rulemaking because it alters the
limited practice right established in 1959 after notice and comment.
18
Finally, the AICPA argues the Revenue Procedure must be
a legislative rule by process of elimination. Specifically, it
argues the Revenue Procedure cannot be an interpretive rule, a
procedural rule, or a policy statement, all of which may be
adopted without notice and comment.
See Diss. at 6-9 (citing Appearance of Unenrolled Preparers of
Returns, 24 Fed. Reg. 1157 (Jan. 29, 1959) (final rule)). Our
colleague’s focus upon the 1959 rule is misplaced, we think, for two
reasons. First, as we explain below, the Program interprets the term
“competency” in 330(a), the statutory authority to exclude
practitioners – i.e., those admitted through the limited practice right
– who do not demonstrate the statutorily-mandated qualifications. In
other words, the limited practice right established by the 1959
legislative rule is constrained not by the Program but by an Act of
Congress, § 330(a). That the concept of competency appears in both
the relevant statute and a legislative rule does not ipso facto require
the agency to promulgate a legislative rule every time it seeks to
interpret the relevant statute.
Second, taking our colleague’s invitation to focus upon what the
Program actually says, see, e.g., Diss. at 11-13, it is difficult to see
how the Program “amends a legislative rule,” id. at 6, viz. the 1959
rule, of which it makes no mention while, by its terms, the Program
“modifies and supersedes Revenue Procedure 81-38,” see REV.
PROC. 2014-42, § 1 (citing REV. PROC. 81-38, 1981-35 I.R.B. 12),
the several predecessors of which stretch back to 1959. See, e.g.,
REV. PROC. 68-20, 1968-1 C.B. 812 (1968); REV. PROC. 59-3, 1959-
1 C.B. 801 (1959). The dissent muses that the IRS “perhaps
mistakenly” issued Revenue Procedure 81-38 without a notice and
comment rulemaking, Diss. at 8; if so, then the agency has been
mistakenly issuing this sequence of revenue procedures for almost
sixty years.
19
The AICPA first argues the rule cannot be an interpretive
rule – or, implicitly, anything else other than a legislative rule
– because § 330(a) is permissive, using the word “may” to grant
the IRS the authority to issue implementing regulations, which
still must be promulgated through notice-and-comment
rulemaking. The proposition that an agency must use notice-
and-comment rulemaking whenever the operative statute
permits (“may regulate”) – but does not require – it to regulate
is, to say the least, novel. The only authority the AICPA cites
involved rules disguised as “guidance letters” that in fact
“supplement[ed] the statute by imposing specific duties” on the
plaintiffs. Mendoza, 754 F.3d at 1021-22.
The AICPA also argues the Revenue Procedure cannot be
an interpretive rule, and in its view therefore must be a
legislative rule, because it “contains not a word of the reasoned
statutory interpretation ... that typifies an interpretative rule.”
We disagree, although we acknowledge the agency could have
been more clear. By clarifying how an unenrolled preparer
seeking to practice before the IRS may “demonstrate ...
necessary qualifications ... and competency” within the
meaning of § 330(a), the Revenue Procedure “reflects an
agency’s construction of a statute that has been entrusted to the
agency to administer.” Syncor Int’l Corp. v. Shalala, 127 F.3d
90, 94 (D.C. Cir. 1997); see Interport Inc. v. Magaw, 135 F.3d
826, 828-29 (D.C. Cir. 1998) (holding a rule interpretive where
“it explains more specifically what is meant” in another
authority, in that case a legislative rule). As stated above, the
Program requires unenrolled preparers who want to participate
to complete a set number of hours of instruction, on specific
topics, and pass a test before gaining the limited practice right.
See REV. PROC. 2014-42 §§ 4, 6. Those requirements are the
20
agency’s interpretation of what § 330(a) means by
“competency” and the other criteria it lists. 4
Because we conclude the Revenue Procedure is an
interpretive, not a legislative, rule, we hold the IRS did not
violate the APA by failing to follow notice-and-comment
rulemaking procedures in promulgating it.
4
We also disagree with the dissent’s assertion that the term
“competency” is “ordinarily” too vague to be interpreted, see Diss.
at 13, for three reasons. First, the cases cited are inapplicable. In
Catholic Health Initiatives v. Sebelius, we held the statutory term
“reasonable cost” too vague to interpret because “reasonable” is a
“vague or vacuous term[].” 617 F.3d 490, 495-96 (D.C. Cir. 2010).
In Paralyzed Veterans of America v. D.C. Arena L.P., we more
generally disapproved interpreting “very general … terms like
‘equitable’ or ‘fair.’” 117 F.3d 579, 588 (D.C. Cir. 1997).
Competency is not a similarly broad term. Second, in a somewhat
analogous situation a sister circuit has held “competency” is
amenable to interpretation. See Premysler v. Lehman, 71 F.3d 387,
388 (Fed. Cir. 1995) (holding agency rule imposing competency
requirements is an interpretive rule because it clarified requirements
in a statute and associated legislative rule that practitioners before
the agency show they “are possessed of the necessary qualifications”
sufficient to “enable him or her to render applicants for patents
valuable service”); see also Sperry v. Florida ex rel. Florida Bar,
373 U.S. 379, 384-85 (1963) (summarizing the same statute and
regulation). Third, and perhaps most important, the statute facilitates
interpretation by describing the specific type of competency a
prospective representative should demonstrate, namely,
“competency to advise and assist persons in presenting their cases,”
31 U.S.C. § 330(a)(2)(D), and qualifications “necessary … to enable
the representative to provide to persons valuable service,” id. at §
330(a)(2)(C).
21
3. Arbitrary and Capricious Review
Finally, the AICPA argues the Program is arbitrary and
capricious. In entertaining this claim, our review “is narrow,”
for “a court is not to substitute its judgment for that of the
agency.” Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29, 43 (1983). The agency must have
“examine[d] the relevant data and articulate[d] a satisfactory
explanation for its action including a rational connection
between the facts found and the choice made.” Id. (internal
quotation marks omitted).
First, the AICPA argues that we must vacate the Program
if in adopting it the IRS “entirely failed to consider an
important aspect of the problem” it was addressing. Id.
Specifically, the AICPA argues the IRS did not respond to its
concern, before implementing the Program, that a public
database of provider credentials may confuse taxpayers. The
AICPA expressed these concerns in a July 6, 2011 letter to the
IRS and again in its July 28, 2011 congressional testimony.
The AICPA argued then that “any public database developed
by IRS that is designed to serve as a ‘look-up’ function where
taxpayers may search for their preparer should be structured to
mitigate any taxpayer confusion regarding the relative
qualifications of the different classes of tax return preparers.”
The Implementation of the IRS Paid Tax Return Preparer
Program: Hearing Before the Subcomm. on Oversight of the
H. Comm. on Ways and Means, 112th Cong. 52 (2011)
(statement of Patricia Thompson).
The IRS responds that the directory does what the AICPA
requested, and indeed it does: It allows users to filter the
directory to show each category of service provider separately,
including those identified in the directory as “Annual Filing
22
Season Program Participant[s].” See IRS, Directory of Federal
Tax Return Preparers with Credentials and Select
Qualifications, https://irs.treasury.gov/rpo/rpo.jsf (last
accessed May 6, 2018). The directory is also linked to a primer
describing the various qualifications in greater detail. See IRS,
Understanding Tax Return Preparer Credentials and
Qualifications, https://www.irs.gov/tax-
professionals/understanding-tax-return-preparer-credentials-
and-qualifications (last accessed May 6, 2018). These features
indicate the IRS considered and addressed the AICPA’s
comment.
Second, the AICPA argues the IRS violated its obligation
under the APA to “consider all reasonable alternatives
presented to it.” LaClede Gas Co. v. FERC, 873 F.2d 1494,
1498 (D.C. Cir. 1989). In particular, the AICPA points to a
June 24, 2014 letter it submitted to the IRS in the wake of the
Loving litigation, suggesting the agency had ample authority to
punish “unethical or fraudulent tax return preparers” without
adopting the Program. Nowhere in those comments, however,
did the AICPA propose an alternative way to deal with the
problem of incompetent tax preparers and taxpayers who
cannot tell whether an uncredentialed tax preparer is or is not
competent. We cannot fault the IRS for failing to consider an
alternative that was not addressed to the problem with which it
was concerned.
III. Conclusion
For the reasons stated above, we hold the AICPA has
standing to sue but the IRS prevails on the merits of the case.
Accordingly, we remand the case to the district court for the
purpose of entering judgment for the IRS.
So ordered.
GRIFFITH, Circuit Judge, concurring in part and dissenting
in part: I agree with all of the majority opinion except for its
conclusion in Part II.B.2 that the IRS could lawfully issue the
Annual Filing Season Program without public notice and
comment.
I
Whenever an agency engages in “rule making,” it
generally must notify the public of the substance of the
proposed rule and provide interested persons opportunity to
comment. 5 U.S.C. § 553(b)(1)-(3), (c). “Rule making” is
defined in the APA to include any “agency process for
formulating, amending, or repealing a rule.” Id. § 551(5). And
a “rule” is defined as an “agency statement of general or
particular applicability and future effect designed to
implement, interpret, or prescribe law or policy or describing
the organization, procedure, or practice requirements of an
agency.” Id. § 551(4). This definition of “rule” is broad. So
broad, in fact, that it “include[s] nearly every statement an
agency may make” and “the breadth of this definition cannot
be gainsaid.” Batterton v. Marshall, 648 F.2d 694, 700 (D.C.
Cir. 1980). Neither the majority nor the IRS disputes that the
Program falls within this broad definition.
The APA’s notice-and-comment requirements do not, on
their face, apply to any single type of rule. Instead, they apply
to “rules” generally. See 5 U.S.C. § 553(b)-(c). Therefore, as a
default, any agency rule may be promulgated only after public
notice and opportunity for comment. The only types of rules
excluded from notice and comment are those expressly
excepted: “interpretative rules, general statements of policy, or
rules of agency organization, procedure, or practice.” Id.
§ 553(b)(3)(A). Only if a rule falls into one of these three
categories can it escape the APA’s notice-and-comment
requirements.
2
II
The most common administrative rules requiring notice
and comment are “legislative” or “substantive” rules. See, e.g.,
Mendoza v. Perez, 754 F.3d 1002, 1021 (D.C. Cir. 2014).
Stated most succinctly, the defining characteristic of a
legislative rule is that it carries the “force and effect of law.”
Appalachian Power Co. v. EPA, 208 F.3d 1015, 1020 (D.C.
Cir. 2000). A valid legislative rule is therefore a “binding rule
of law not subject to challenge in particular cases.” Pac. Gas &
Elec. Co. v. Fed. Power Comm’n, 506 F.2d 33, 39 (D.C. Cir.
1974). Therefore, when an agency “expresses a change in
substantive law or policy (that is not an interpretation) which
the agency intends to make binding, or administers with
binding effect,” its action “must observe the APA’s legislative
rulemaking procedures.” Gen. Elec. Co. v. EPA, 290 F.3d 377,
382-83 (D.C. Cir. 2002) (internal quotation marks omitted).
The majority concludes that the Program lacks these
attributes of a legislative rule. I disagree.
A
The majority begins its analysis by determining whether
the Program carries the force of law. Maj. Op. at 16-17. The
majority concludes that the Program does “not bind unenrolled
preparers” because it “merely provides an opportunity for those
unenrolled preparers who both choose to participate and satisfy
its requirements.” Id. at 16. In other words, because the
Program creates obligations only for those who voluntarily
participate in the Program, it is not legislative in character.
Even assuming that this voluntary aspect of the Program
means that it does not bind participating unenrolled preparers,
the majority’s analysis overlooks at least two other classes of
3
regulated entities affected by the Program’s existence:
supervisors and non-participating unenrolled preparers.
As the majority recognizes in its standing analysis, the
Program substantially affects the interests of those who
supervise unenrolled preparers. Id. at 7 (“Some members of the
AICPA are injured by the Program because it imposes new
supervisory responsibilities on them.”). When an unenrolled
preparer voluntarily participates in the Program, he consents to
being subject to the “duties and restrictions relating to practice
before the IRS” in Circular 230. Rev. Proc. 14-42, § 4.05(4).
This triggers another provision in Circular 230 applying to
supervisors, who must then “take reasonable steps” to ensure
that participating unenrolled preparers comply with the
Circular. 31 C.F.R. § 10.36(a). Any supervisor that fails to
fulfill that duty “will be subject to discipline,” id. § 10.36(b),
including suspension, disbarment, disqualification, or
monetary penalties, id. § 10.50(a)-(c); see also Maj. Op. at 8
(discussing the Program’s adverse effects on supervisors).
Therefore, supervisors—who do not affirmatively choose
to “participate” in the Program, Maj. Op. at 16—can be subject
to discipline as severe as monetary penalties. Legislative rules
“grant rights” or “impose obligations” on private interests,
Batterton, 648 F.2d at 701-02, or otherwise “effect[] a
substantive . . . change to the . . . regulatory regime,” Elec.
Privacy Info. Ctr. v. U.S. Dep’t of Homeland Sec., 653 F.3d 1,
6-7 (D.C. Cir. 2011) (Ginsburg, J.). By expanding the coverage
of Circular 230 and imposing the Circular’s obligations on
supervisors of participating unenrolled preparers, the Program
changes the regulatory regime. These supervisors, at least, have
new duties and obligations. Such an effect makes the Program
a quintessential legislative rule; that unenrolled preparers
participate in the Program by choice does not diminish its
mandatory regulatory effect on others.
4
The majority also fails to appreciate the Program’s
unquestionable effect on non-participating unenrolled
preparers. Before the Program, an unenrolled preparer could
represent taxpayers before IRS examining officers, subject to a
relatively narrow set of exceptions. See Rev. Proc. 81-38,
§ 9.01. After the Program, however, unenrolled preparers who
do not participate are not permitted to practice before the IRS.
See Rev. Proc. 14-42, § 6.02. If a non-participating unenrolled
preparer now attempts to represent a taxpayer before the IRS,
he will likely be turned away by the examining officer.
But if that preparer proceeds to represent the taxpayer
anyway, he will be subject to sanctions under Circular 230.
Even though the Program implies that only participating
preparers will be subject to the duties and restrictions in
Circular 230, id. § 4.05(4), that is only because the Program
limits the universe of unenrolled preparers who represent
taxpayers before the IRS to Program participants. There is no
reason to think the Program exempts from discipline preparers
who represent taxpayers without authorization. Since at least
1981, the IRS has subjected all unenrolled preparers who
appear before the agency to § 10.51 of Circular 230. See Rev.
Proc. 81-38, § 7.01. And § 10.51 prohibits the willful
representation of taxpayers before the IRS without the
Service’s authorization. See 31 C.F.R. § 10.51(a)(18). A non-
participating preparer who represents a taxpayer after the
Program’s effective date will violate § 10.51 and be subject to
sanctions that include censure, suspension, disbarment, and
monetary penalties. See id. § 10.50(a)-(c).
In sum, non-participating unenrolled preparers are
prohibited from representing taxpayers before the IRS, and that
prohibition is backed up by significant penalties. The Program
thus imposes a new “obligation[],” “prohibition[],” or
5
“requirement[]” on unenrolled preparers who seek to represent
taxpayers before the IRS and avoid participation in the
Program. Nat’l Mining Ass’n v. McCarthy, 758 F.3d 243, 252
(D.C. Cir. 2014). It is a legislative rule.
The majority resists this conclusion by claiming that the
Program imposes no “new or different” requirements because
“Circular 230 bound supervisors and unenrolled [preparers]
before the Program took effect.” Maj. Op. at 16-17. But this
does not withstand careful scrutiny. The Program requires
participating unenrolled preparers to consent to be subject to
“subpart B and section 10.51 of Circular 230.” Rev. Proc. 14-
42, § 4.05(4). Although unenrolled preparers have had to
comply with § 10.51 of Circular 230 since at least 1981, see
Rev. Proc. 81-38, § 7.01, only by participating in the Program
are unenrolled preparers subject to the entirety of subpart B,
which includes a host of additional duties not included in
§ 10.51.
And even if those duties in subpart B are voluntarily
assumed by participating preparers, they involuntarily change
the supervisory obligations imposed on AICPA members.
Under Circular 230, AICPA members “must take reasonable
steps to ensure” that they have “adequate procedures in effect
for all . . . employees for purposes of complying with subparts
A, B, and C of [Circular 230], as applicable.” 31 C.F.R.
§ 10.36 (emphasis added). But for the Program, subpart B of
Circular 230 would not be “applicable” to any unenrolled
preparer, even if the preparer represented taxpayers before the
IRS pursuant to Revenue Procedure 81-38. See Maj. Op. at 8
(explaining that the Program “extends the scope of Circular
230 to participating unenrolled preparers”). And because of the
Program, AICPA members must supervise unenrolled
preparers’ adherence to portions of Circular 230 that never
before regulated them.
6
The majority also errs by claiming that the Program does
not subject the tax preparation practice of unenrolled preparers
to subpart B. Id. at Maj. Op. at 17 n.2. Participating preparers
are “subject to the duties and restrictions relating to practice
before the IRS in subpart B and § 10.51.” Rev. Proc. 14-42,
§ 4.05(4). And subpart B regulates aspects of tax preparation.
See, e.g., 31 C.F.R. § 10.22(a) (requiring practitioners to
“exercise due diligence” when “preparing or assisting in the
preparation of, approving, and filing tax returns”); id.
§ 10.34(a) (describing actions that may not be taken when
preparing tax returns). Never before have unenrolled preparers
been subject to Circular 230 except for § 10.51, and then only
when they “s[ought] to represent taxpayers . . . before [IRS]
examining officers.” Rev. Proc. 81-38, § 3. Before the
Program, supervisors of unenrolled preparers who did only tax
preparation had no Circular 230 supervisory duties. Now, those
duties apply to supervisors of all participating unenrolled
preparers.
At bottom, the majority is mistaken to claim that
supervisors are not subject to “new or different” supervisory
requirements under the Program. Maj. Op. at 16. The new
duties imposed on some unenrolled preparers necessarily
impose “new substantive burdens” on their supervisors.
Aulenback, Inc. v. Fed. Highway Admin., 103 F.3d 156, 169
(D.C. Cir. 1997).
B
The Program also takes away from non-participating
unenrolled preparers their limited right to practice before the
IRS, which was first granted in 1959 after notice-and-comment
rule making. And any agency action that revokes or amends a
legislative rule is itself a legislative rule. Am. Mining Congress
7
v. Mine Safety & Health Admin., 995 F.2d 1106, 1112 (D.C.
Cir. 1993). The majority argues instead that this limited
practice right was created by Revenue Procedure 81-38, which
was issued without notice and comment in 1981. Maj. Op. at
17. But the majority overstates the importance of Revenue
Procedure 81-38 in defining preparers’ representation rights.
In 1959, the Department of Treasury first granted
unenrolled preparers the right to practice before the IRS. See
Appearance of Unenrolled Preparers of Returns, 24 Fed. Reg.
1157, 1157-58 (Feb. 14, 1959). When granting that right, the
Department also specified that these unenrolled preparers
would be “subject to such rules regarding standards of conduct,
the extent of their authority, and other matters as the [IRS] shall
prescribe.” Id. at 1158 (emphasis added). Finally, the
regulation announced that the “circumstances and conditions
under which an unenrolled preparer . . . may appear as the
taxpayer’s representative . . . will be published in the Internal
Revenue Bulletin.” Id.
The 1959 regulation’s use of the verb “prescribe” is
telling. To “prescribe” is to “lay down rules [and] laws,” or to
“lay down as a rule or direction to be followed” or “impose
authoritatively.” Oxford English Dictionary (3d ed. 2007),
http://www.oed.com/view/Entry/150644. When referring to
law, “prescribe” means that the law has “force or power.” Id.
And to “prescribe” some law or policy is not synonymous with
“interpreting” law or policy. See 5 U.S.C. § 551(4) (defining a
“rule” as an agency statement designed to “implement,
interpret, or prescribe law or policy”).
The majority claims that “the limited practice afforded
unenrolled preparers . . . was the product of Revenue Procedure
81-38,” Maj. Op. at 17, which also purported to “prescribe the
standards of conduct . . . and the circumstances and conditions
8
under which” an unenrolled preparer could exercise “the
privilege of limited practice” before the IRS, Rev. Proc. 81-38,
§ 1 (emphasis added). But the practice right of unenrolled
preparers was not “the product of” Revenue Procedure 81-38;
it was the product of the 1959 regulation. That Revenue
Procedure 81-38 refined the practice right created in 1959 does
not mean that the practice right itself flowed from Revenue
Procedure 81-38. The proper baseline for evaluating the
Program’s effect on unenrolled preparers is the 1959
regulation. And to the extent that Revenue Procedure 81-38
“prescribed” limitations on unenrolled preparers that could not
be inferred from a statute or existing legislative rule, it would
be a legislative rule. The fact that the IRS issued Revenue
Procedure 81-38 without notice and comment—perhaps
mistakenly—does nothing to save the Program. Two wrongs
don’t make a right.
That said, comparing Revenue Procedure 81-38 to the
Program is comparing apples to oranges. On the one hand,
Revenue Procedure 81-38 did list certain persons who were
“ineligible to exercise the privilege of limited practice” before
the IRS. Id. § 9.01. But these disqualifications echoed those
established through notice-and-comment rule making in
Circular 230, which applied to any individual, not just
unenrolled preparers, who sought to represent taxpayers before
the IRS. For example, Revenue Procedure 81-38 excluded
“[a]ny individual” who was “under disbarment or suspension
from practice as an attorney, certified public accountant, public
accountant or actuary” or had been “disbarred or suspended
from practice before” the IRS. Id. § 9.01(b), (c). These
restrictions repeated those made by Circular 230, which
excluded “[a]ny individual who [was] under disbarment or
suspension from practice before the [IRS] or from practice of
his profession by any other authority (in the case of attorneys,
certified public accountants, and public accountants).” 31
9
C.F.R. § 10.7(a)(7) (1970). Similarly, Revenue Procedure 81-
38 broadly prohibited officers and employees of the United
States and the states from representing taxpayers before the
IRS. See Rev. Proc. 81-38, § 9.01(g), (h). Again, these
restrictions repeated those in Circular 230 and applied to any
individual seeking to practice before the IRS. See 31 C.F.R.
§ 10.3(f), (g) (1970).
On the other hand, the Program prohibits unenrolled
preparers from practicing before the IRS unless they take a
course, pass an exam, and complete at least eighteen hours of
continuing education. See Rev. Proc. 14-42, § 4.05(1)-(3).
Nothing remotely similar to these restrictions appears in any
IRS regulation promulgated via notice-and-comment rule
making. The restrictions in Revenue Procedure 81-38 that
repeated the restrictions in Circular 230 did not meaningfully
limit the practice right created and defined through the notice-
and-comment process. But the same cannot be said of the
restrictions imposed by the Program, which substantially
change practice requirements and were not drawn from an
existing legislative rule.
As such, I cannot agree with the majority that the Program
merely amended Revenue Procedure 81-38. I view the Program
to effectively amend the practice right first prescribed in 1959
and clarified through notice-and-comment rule making in
Circular 230 and its later revisions. When a rule “effectively
amends a prior legislative rule . . . we have a legislative . . .
rule.” Am. Mining Congress, 995 F.2d at 1112; see also
Mendoza, 754 F.3d at 1024. The Program amends a legislative
rule, and so it must be a legislative rule. 1
1
The majority contends that my focus on the 1959 regulation is
“misplaced” for two reasons. Maj. Op. at 18 n.3. First, that whatever
additional limitations the Program imposed that cannot be derived
10
III
Because the APA’s rule making procedures apply by
default, see 5 U.S.C. § 553(a)-(c), the notice-and-comment
requirement applies to the Program unless it is an interpretative
rule, policy statement, or procedural rule, id. § 553(b)(3)(A).
The majority concludes that the Program falls within the
exception for interpretive rules, but I remain unpersuaded.
Given the APA’s presumption in favor of public
participation in rule making, the exceptions to notice and
comment are to be “narrowly construed and only ‘reluctantly
countenanced.’” Sentara-Hampton Gen. Hosp. v. Sullivan, 980
from Circular 230 are derived from 31 U.S.C. § 330(a). Id. But the
Program does much more than interpret the statute, which I explain
below. See infra Part III. Second, the majority claims that the
Program by its own terms “modifies and supersedes Revenue
Procedure 81-38,” not the 1959 rule. Rev. Proc. 14-42 § 1. But what
a rule claims to do is not always what the rule actually does. We’ve
long recognized that agencies cannot mask the legislative character
of a rule with a non-legislative label. See Appalachian Power Co.,
208 F.3d at 1024 (“It is well-established that an agency may not
escape the notice and comment requirements . . . by labeling a major
substantive legal addition to a rule a mere interpretation.” (citation
omitted)); Office of Commc’n of United Church of Christ v. FCC,
826 F.2d 101, 105 (D.C. Cir. 1987) (“Since the court reviews not the
label but the agency pronouncement that underlies the label, it is that
pronouncement itself that governs the determination of its status.”).
Moreover, the Program’s express modification and preemption of
Revenue Procedure 81-38 does not rule out the conclusion that the
Program also implicitly amends the 1959 rule. As explained above,
the relevant question is whether the Program “effectively amends”
the 1959 rule, which does not require it to expressly invoke the rule.
Am. Mining Congress, 995 F.2d at 1112 (emphasis added).
11
F.2d 749, 759 (D.C. Cir. 1992) (quoting Alcaraz v. Block, 746
F.2d 593, 612 (9th Cir. 1984)); see also Orengo Caraballo v.
Reich, 11 F.3d 186, 195 (D.C. Cir. 1993) (“Mindful of
congressional intent in creating the APA . . . we have been
careful to construe § 553(b)(A)'s exceptions to the rulemaking
requirements narrowly.” (internal quotation marks omitted));
Am. Bus Ass’n v. United States, 627 F.2d 525, 528 (D.C. Cir.
1980) (“Congress was alert to the possibility that these [notice-
and-comment] exceptions might, if broadly defined and
indiscriminately used, defeat the section’s purpose. Thus,
the legislative history of the section is scattered with warnings
that various of the exceptions are not to be used to escape the
requirements of section 553.”).
To be an interpretive rule, “the rule must be interpreting
something.” Cent. Tex. Tel. Co-op., Inc. v. FCC, 402 F.3d 205,
212 (D.C. Cir. 2005). It must “derive a proposition from an
existing document whose meaning compels or logically
justifies the proposition.” Id. (internal quotation marks omitted)
(emphasis added). Put another way, an interpretative rule
announces the agency’s understanding of what the law means
and “reminds affected parties of existing duties.” Interport Inc.
v. Magaw, 135 F.3d 826, 828 (D.C. Cir. 1998) (quoting Gen.
Motors Corp. v. Ruckelshaus, 742 F.2d 1561, 1565 (D.C. Cir.
1984) (en banc)).
The majority reasons that the Program “reminds”
unenrolled preparers of their preexisting duties by interpreting
a single word in § 330(a)—“competency.” Maj. Op. at 19.
According to the majority, the Program’s “requirements are the
agency’s interpretation of what § 330(a) means by
‘competency’ and the other criteria it lists.” Id. at 20.
Although the Program may relate to the development of
unenrolled preparers’ “competency,” it is not an interpretation
12
of that word. There is no evidence in the Program of “reasoned
statutory interpretation, with reference to the language, purpose
and legislative history.” Gen. Motors Corp., 742 F.2d at 1565.
The majority maintains that the Program reflects the agency’s
construction of § 330(a), even though the IRS “could have been
more clear.” Maj. Op. at 19. Clarity is not the problem. The
problem is the agency’s failure to engage in any identifiable
mode of statutory interpretation.
The Program describes the “competency” required from
“paid tax return preparers.” Rev. Proc. 14-42, § 2. But § 330(a)
authorizes regulations for “the practice of representatives of
persons before the Department of the Treasury.” (emphasis
added). As we held in Loving v. IRS, § 330 does not govern
“tax-return preparers . . . when they simply assist in the
preparation of someone else’s tax return” because they “do not
practice before the IRS.” 742 F.3d 1013, 1018 (D.C. Cir. 2014)
(emphasis in original). An interpretation of § 330(a) must aim
to clarify the standards of practice before the IRS, not tax
preparation. Yet the Program’s stated goals are “accurate return
preparation, improved tax compliance, effective tax
administration, and protecting taxpayers from preparer errors.”
Rev. Proc. 14-42, § 2. To be sure, the Program also explains
that requiring “continuing education courses related to federal
tax law” will improve the competency of tax preparers when
they represent taxpayers before the IRS. Id. But this reads like
an afterthought, not like the basis for the Program’s entry
requirements.
More revealing is the Program’s failure to link those
requirements to the “competency” standard in § 330(a). The
Program cites § 330(a) once. It includes no hint of the agency’s
attempt to engage with the provision’s language, much less an
explanation of how the provision “compels or logically
justifies” a requirement that tax-return preparers take
13
continuing education courses in tax law. Cent. Tex. Tel. Co-op.,
402 F.3d at 212.
Nor does the Program indicate how its requirements
merely “remind[] affected parties of existing duties,” Gen.
Motors Corp., 742 F.2d at 1565, especially in light of the fact
that § 330(a) does not impose any duties itself. Instead, it
authorizes the Treasury Secretary to establish duties to promote
“competency,” among other virtues. Congress may have
delegated to IRS the power to impose such duties, but only after
the agency “provid[es] adequate notice and comment.”
Fertilizer Inst. v. EPA, 935 F.2d 1303, 1308 (D.C. Cir. 1991).
Further, “competency” in § 330(a) is a “vague or vacuous
term[]—such as ‘fair and equitable,’ ‘just and reasonable,’ ‘in
the public interest,’ and the like,” and “the process of
announcing propositions that specify applications of those
terms is not ordinarily one of interpretation.” Catholic Health
Initiatives v. Sebelius, 617 F.3d 490, 495 (D.C. Cir. 2010)
(internal quotation marks omitted). Interpretation is difficult
because “those terms in themselves do not supply substance
from which the propositions can be derived.” Id. So even if the
Program were an attempt to interpret “competency,” the result
would be “a substantive regulation.” Paralyzed Veterans of
Am. v. D.C. Arena L.P., 117 F.3d 579, 588 (D.C. Cir. 1997)
(“If the statute or rule to be interpreted is itself very general,
using terms like ‘equitable’ or ‘fair,’ and the ‘interpretation’
really provides all the guidance, then the latter will more likely
be a substantive regulation.”). 2
2
I do not contend that “competency” may never serve as the
basis of an interpretive rule. See Maj. Op. at 20 n.5. The word
“competency” is certainly “amenable to interpretation,” id., as are
other general words like “equitable,” “fair,” and “reasonable,” see
Catholic Health Initiatives, 617 F.3d at 495 (explaining that specific
14
The distinction between interpretative and legislative rules
“turns on how tightly the agency’s interpretation is drawn
linguistically from the actual language of the statute.” Id. The
Program’s specific requirements for demonstrating
competency—including continuing education and a
comprehension test—are not tightly drawn from the language
of § 330(a), which provides little concrete guidance. And the
other criteria for representation listed in § 330(a) are similarly
indefinite. See 31 U.S.C. § 330(a)(2)(A)-(C) (listing “good
character,” “good reputation,” and “necessary qualifications
. . . to provide . . . valuable service”). None of these criteria
supplies a basis for the Program’s specific application. 3
applications of general terms are “ordinarily” not interpretative). My
critique is not that the IRS cannot interpret “competency” to mean
something more specific. Instead, I read the Program—with its
precise and rigid requirements—as too loosely “drawn linguistically
from the actual language of” § 330. Paralyzed Veterans, 117 F.3d at
588. The question is one of degree, not of kind. Perhaps the IRS
could have issued a less categorical, less absolute, and more general
regulation that would have been an interpretation, but it did not.
3
The majority’s appeal to the Federal Circuit’s decision in
Premysler v. Lehman, 71 F.3d 387 (Fed. Cir. 1995), is unavailing.
See Maj. Op. 20 n.5. I agree that the statute in Premysler shares
common features with § 330(a). For example, under § 330 the
Secretary of the Treasury “may require” practicing individuals to
demonstrate, among other things, “necessary qualifications” and
“competency to advise and assist persons in presenting their cases.”
§ 330(a)(2)(C), (D). Likewise, at the time of Premysler, 35 U.S.C.
§ 31 (1995) authorized the Commissioner of Patents to “require” any
representative before the Patent and Trademark Office (PTO) to
show that he was “possessed of the necessary qualifications to render
applicants or other persons valuable service, advice, and assistance.”
In response, the Commissioner established a qualification exam.
Premysler, 71 F.3d at 388. However, the examination requirement
was promulgated after notice and comment. See Practice Before the
15
Patent and Trademark Office, 50 Fed. Reg. 5158, 5174 (Feb. 6, 1985)
(codified at 37 C.F.R. § 10.7(b) (1995)). Therefore, to the extent that
the examination requirement was a reasonable implementation of 35
U.S.C. § 31’s competency provision, apparently the Commissioner
did not think that the language of the statute alone sufficed to impose
that requirement because he invoked his substantive rule making
authority to do so. If anything, this feature of Premysler highlights
how unusual it is for an agency to invoke its interpretive authority,
rather than its legislative authority, to justify an examination
requirement.
The regulation upheld as non-legislative in Premysler is also
readily distinguishable from the Program. The PTO’s guidance
described “criteria that are generally sufficient to show technical
competence qualifying an individual to sit for the examination.”
Premysler, 71 F.3d at 388 (emphasis added). Importantly, the PTO’s
bulletin stated that its understanding of “competency” was “not
dispositive in determining whether an applicant may sit for the PTO
examination.” Id. at 390. On the contrary, in Premysler the
Commissioner himself found that a lower-ranked official
“improperly based his decision” rejecting Premysler’s application to
sit for the examination “solely on the categories” of competence set
forth in the bulletin. Id. at 389. The Commissioner ultimately
“undertook a review of Mr. Premylser’s qualifications without
regard for the [bulletin].” Id. at 390 (emphasis added). As the Federal
Circuit concluded, the bulletin, “alone, d[id] not prevent anyone from
taking the examination.” Id. Therefore, to whatever extent the
Federal Circuit upheld the PTO’s bulletin as an “interpretation” of a
competency-related statutory provision, it did so largely because the
bulletin set forth rebuttable guidelines, rather than strict
requirements. This is crucial, as an “agency remains free in any
particular case to diverge from whatever outcome the . . . interpretive
rule might suggest.” Viet. Veterans of Am. v. Sec. of the Navy, 843
F.2d 528, 537 (D.C. Cir. 1988); see also Alaska v. U.S. Dep’t of
Transp., 868 F.2d 441, 445 (D.C. Cir. 1989) (explaining that an
interpretative rule “genuinely leaves the agency . . . free to exercise
discretion” (internal quotation marks omitted)). The PTO’s bulletin
was an interpretative rule because it was “not binding” and instead
16
Indeed, the majority’s description of the Program reveals
its legislative character. As the majority explains, the
Program’s interpretation of “competency” demands of
unenrolled preparers a “set number of hours of instruction” and
“a minimum score on a test.” Maj. Op. at 19. Both aspects
feature a numerical cutoff. According to the Program, an
unenrolled preparer who completes 17.5 hours of continuing
education and scores a 69% on the IRS’s test is too
“incompetent” to represent taxpayers before the IRS. See Rev.
Proc. 14-42, § 4.05(3)(a); Annual Filing Season Annual Tax
Refresher (AFTR) Course, https://www.irs.gov/pub/irs-
utl/aftr_test_parameters.pdf (setting the passing score at 70%).
But a preparer who completes 18 hours of continuing education
and scores a 71% on the test is “competent” (assuming he can
meet the Program’s other requirements).
We have previously recognized that an agency “performs
a legislative function when it makes ‘reasonable but arbitrary
. . . rules that are consistent with the statute or regulation . . .
but not derived from it, because they represent an arbitrary
choice among methods of implementation. A rule that turns on
a number is likely to be arbitrary in this sense.’” Catholic
Health Initiatives, 617 F.3d at 495 (quoting Hoctor v. USDA,
82 F.3d 165, 171 (7th Cir. 1996)). The Program reduces an
unenrolled preparer’s “competency” to a set of numbers, none
of which is derivable from the text, structure, or history of
left “agency decisionmakers with some discretion” to decide who
could sit for the examination. Tax Analysts v. IRS, 117 F.3d 607, 617
n.9 (D.C. Cir. 1997). The Program, by contrast, rigidly restricts
practice before the IRS only to those that meet a specific set of
requirements, and these restrictions bind the IRS until the Program
is vacated or displaced. Premysler cannot rescue the Program from
notice and comment.
17
§ 330(a) or the field of taxpayer representation. See id.
(suggesting that in “technical areas, where quantitative criteria
are common, a rule that translates a general norm into a number
may be justifiable as interpretation” (quoting Hoctor, 82 F.3d
at 171)). 4 The numerical cutoffs look arbitrary, and thus
legislative, because it is “impossible to give a reasoned
distinction between numbers just a hair on the OK side of the
line and ones just a hair on the not-OK side.” Id. at 496 (quoting
Mo. Pub. Serv. Comm’n v. FERC, 215 F.3d 1, 4 (D.C. Cir.
2000)).
The majority also dismisses the relevance of the
permissive language in § 330(a), which states that the Treasury
Secretary “may” require representatives before the IRS to
demonstrate “competency” and other attributes. See Maj. Op.
at 19. The majority is surely correct to reject the notion that “an
agency must use notice-and-comment rule making whenever
the operative statute permits (‘may regulate’)–but does not
require—it to regulate.” Id. (emphasis added). But that doesn’t
license us to entirely overlook the statute’s permissive
language.
A statute that “actually establishes a duty or right is likely
to be relatively specific (and the agency’s refinement will be
interpretive), whereas an agency’s authority to create rights and
4
I concede that “[e]ven in a nontechnical area the use of a
number as a rule of thumb to guide the application of a general norm
will often be legitimately interpretive.” Hoctor, 82 F.3d at 171. But
the Program is not merely a “rule of thumb.” It creates a set of flat,
“unbending” rules determining who may practice before the IRS. Id.
If failure to satisfy the Program’s education and testing requirements
created only a presumption of incompetency, “subject to rebuttal,”
id., perhaps the rule would be interpretive. But that is not what we
face today.
18
duties will typically be relatively broad (and the agency’s
actual establishment of rights and duties will be legislative).”
Am. Mining Congress, 995 F.2d at 1110. In other words, when
a rule is “based on specific statutory provisions,” it is likely to
be interpretative. Id. (quoting United Techs. Corp. v. EPA, 821
F.2d 714, 719 (D.C. Cir. 1987)). But when a rule is instead
“based on an agency’s power to exercise its judgment as to how
best to implement a general statutory mandate,” it is likely to
be legislative. Id. (quoting United Techs. Corp., 821 F.2d at
720).
Section 330(a) does not itself create any rights or duties
for taxpayers or preparers. It merely grants the Secretary power
to create duties applicable to preparers who represent taxpayers
before the IRS. And it does so by giving the Secretary
“relatively broad” discretionary authority to “implement a
general statutory mandate.” The permissiveness of § 330(a),
combined with its generally worded criteria, is yet another clue
that the Program does not merely interpret § 330(a).
In short, there is no way an interpretation of “competency”
“can produce the sort of detailed . . . . and rigid” requirements
the IRS has set forth in the Program. Catholic Health
Initiatives, 617 F.3d at 496. I’ll concede that the Program may
be an “extension” of § 330(a)’s “competency” provision and
probably “consistent” with that provision. Id. But neither of
these concessions “leads to the conclusion that the [Program’s]
limitations represent an interpretation” of § 330(a). Id. The
connection between the Program and § 330(a)’s competency
provision is “simply too attenuated to represent an
interpretation of th[at] term[] as used in the statute.” Id.
19
* * *
I recognize that the line separating “legislative rules” from
“interpretative rules” is often difficult to draw. See Am. Hosp.
Ass’n v. Bowen, 834 F.2d 1037, 1046 (D.C. Cir. 1987) (calling
the line “fuzzy”). But however challenging it may be, the
integrity of agency rule making depends on the judiciary’s
diligent enforcement of that line. Cf. Bank Markazi v. Peterson,
136 S. Ct. 1310, 1336 (2016) (Roberts, C.J., dissenting). When
we fail to police that boundary, we allow exceptions to swallow
the APA’s presumption favoring public participation in rule
making. See U.S. Telecom Ass’n v. FCC, 400 F.3d 29, 35 (D.C.
Cir. 2005) (“[F]idelity to the rulemaking requirements of the
APA bars courts from permitting agencies to avoid those
requirements by calling a substantive regulatory change an
interpretative rule.”).
The APA required public notice and comment before the
IRS issued the Program. Because the IRS did not provide that
opportunity, the Program is unlawful. We should therefore
reverse the judgment of the district court and remand for the
court to enter an order vacating the Program. See Daimler
Trucks N. Am. LLC v. EPA, 737 F.3d 95, 103 (D.C. Cir. 2013)
(“[T]he court typically vacates rules when an agency ‘entirely
fail[s]’ to provide notice and comment . . . .” (first alteration in
original) (quoting Shell Oil Co. v. EPA, 950 F.2d 741, 752
(D.C. Cir. 1991))).
Because I believe the majority’s approach fails to protect
one of the APA’s key procedural safeguards, I respectfully
dissent.