Flynn, John J. v. Cmsnr IRS

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 28, 2001 Decided October 30, 2001

No. 00-1457

John J. Flynn and J. H. Thomas,

Appellants

v.

Commissioner of Internal Revenue Service,

Appellee

Appeal from the United States Tax Court

(No. IRS-18090-99R)

Michael S. Gordon argued the cause and filed the briefs for

appellants.

Steven W. Parks, Attorney, United States Department of

Justice, argued the cause for appellee. With him on the brief

was Kenneth L. Greene, Attorney. Ann W. Muoio, Attorney,

entered an appearance.

Before: Edwards, Rogers, and Tatel, Circuit Judges

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: Section 7476 of the Internal

Revenue Code ("I.R.C.") allows certain qualified employees to

bring an action in the Tax Court for a declaratory judgment

to challenge a determination that their employers' retirement

plan qualifies for favorable tax treatment. I.R.C. s 7476

(1994). Pursuant to the statute's express delegation of au-

thority, the Secretary of the Treasury promulgated regula-

tions determining which employees would be permitted to

utilize the declaratory judgment remedy. See Treas. Reg.

s 1.7476-1(b) (as amended in 1988). Appellants sought to use

s 7476 to challenge the Internal Revenue Service's ("IRS")

determination that the amended retirement plan of their

former employer continued to qualify for favorable tax treat-

ment. The regulations, however, grant standing to use the

declaratory judgment remedy only to current employees, not

former employees like appellants. See id. The United

States Tax Court therefore dismissed appellants' action for a

declaratory judgment and upheld the regulations denying

standing to former employees. See Flynn v. Comm'r, 80

T.C.M. (CCH) 91 (2000).

On appeal, appellants make three arguments. First, they

argue that s 7476 impermissibly delegates authority to the

Secretary to determine which employees may use the declara-

tory judgment remedy, without giving the Secretary guide-

lines for making that determination, in violation of the consti-

tutional nondelegation doctrine. Because appellants did not

raise this argument at the Tax Court, we decline to address it

now. Second, appellants renew their challenge to the validity

of Treas. Reg. s 1.7476-1(b). We find that the Tax Court

correctly upheld the regulation as a reasonable construction

of the statutory language. Finally, appellants argue that

their employer somehow conferred standing on them by

mailing them a "notice to interested parties" informing them

that it was seeking a determination that the amended plan

would continue to receive favorable tax treatment. It is

clear, however, that the rules governing the content of notices

to interested parties do not operate to confer standing on

appellants. We accordingly affirm the judgment of the Tax

Court.

I. Background

A. The s 7476 Declaratory Judgment Provision and the

Applicable Regulations

In 1974, Congress enacted the Employee Retirement In-

come Security Act ("ERISA"), sections of which were codified

as part of the I.R.C. Pub. L. No. 93-406, 88 Stat. 829

(codified as amended at 29 U.S.C. ss 1001-1461 and scattered

sections of the I.R.C., 26 U.S.C. (1994 & Supp. 1999)). Many

of its provisions set forth requirements to which retirement

and other benefit plans must conform. Among these require-

ments are the so-called "backloading rules," mathematical

formulae designed to prevent employers from providing rates

of benefit accrual for older or more experienced workers that

are excessive in relation to the rates of accrual for younger

workers. See I.R.C. ss 401(a)(7) (providing that to qualify

under ERISA, a trust must satisfy the requirements of

s 411); 411(b)(1) (setting forth various mathematical formu-

lae that plans may use) (1994). When retirement plans

comply with ERISA's requirements, they enjoy favorable tax

treatment. ERISA is a remedial statute, whose express

purpose is to protect, inter alia, "the interests of participants

in private pension plans and their beneficiaries." 29 U.S.C.

s 1001(c) (1994); Rettig v. Pension Benefit Guar. Corp., 744

F.2d 133, 155 n.54 (D.C. Cir. 1984) (discussing Congress'

remedial purpose in enacting ERISA).

Internal Revenue Code s 7476 gives the Tax Court juris-

diction to issue a declaration about a retirement plan's qualifi-

cation for favorable tax treatment when there is a controver-

sy involving the Secretary of the Treasury's determination

that a plan qualifies or continues to qualify for such treat-

ment. I.R.C. s 7476(a). Any employee who qualifies as an

"interested party" under regulations prescribed by the Secre-

tary may petition the Tax Court for such a declaration. Id.

The effect of the provision is to allow certain employees and

other interested parties to act as watchdogs: when a plan or

an amendment to a plan hurts those employees' interests by

failing to conform to ERISA's requirements, those employees

can seek a declaration preventing the plan from receiving a

determination that will ensure favorable tax status. Employ-

ers and plan administrators are also interested parties who

can use the declaratory judgment remedy provided in s 7476.

Id.

The regulations authorized by s 7476(b)(1) define several

categories of present employees as "interested parties" who

can challenge plan determinations in most situations, includ-

ing cases involving certain amendments to plans. Treas. Reg.

ss 1.7476-1(b)(1)(i), (ii), (2)(ii), (3)(ii), (4), (5). The only in-

stance in which former employees are included as interest-

ed parties is in the case of plan terminations. Id.

s 1.7476-1(b)(5). When an employer wishes to terminate a

retirement plan that covers former employees with vested

benefits under the plan, those former employees and all

beneficiaries of deceased former employees currently receiv-

ing benefits under that plan have standing to seek a declara-

tory judgment. Id.

Additional regulations require the party applying for quali-

fied status to notify the interested parties referred to in

s 7476(b)(1) of the application for a determination of qualified

status. Treas. Reg. ss 1.7476-1(a)(1), 1.7476-2. The rules

governing the content and timing of notice to interested

parties are set forth at 26 C.F.R. s 601.201 (2001). Part 601

of 26 C.F.R., entitled "Statement of Procedural Rules," con-

sists of rules issued by the Commissioner, rather than by the

Secretary, pursuant to his power to promulgate rules "for the

government of his department, the conduct of its employees,

the distribution and performance of its business, and the

custody, use, and preservation of its records, papers, and

property." 5 U.S.C. s 301 (1994). Section 601.201(o)(3)(xiv)

requires, in cases in which plans apply for determinations of

their qualification for special tax status, that notice of the

application be given to all interested parties "in the manner

set forth in the regulations under section 7476." 26 C.F.R.

s 601.201(o)(3)(xiv). Section 601.201(o)(3)(xvi) requires the

notice to contain, inter alia, a statement that "any person to

whom the notice is addressed is entitled to submit ... a

comment on the question of whether the plan meets the

requirements for qualification." Id. s 601.201(o)(3)(xvi)(g).

B. Appellants' Challenge to the IRS's Favorable Determina-

tion

Appellants are former employees of the International Un-

ion of Operating Engineers ("the Union"), which established

the International Headquarters Pension and Beneficiaries

Plan of the International Union of Operating Engineers ("the

plan") in 1947. Flynn, 80 T.C.M. (CCH) at 92. Around

January 6, 1999, the Union filed an application with the IRS,

seeking a determination that the pension plan would continue

to qualify for favorable tax treatment after the adoption of

certain amendments. See Application for Determination for

Employee Benefit Plan, reprinted in Deferred Appendix

("App.") 35. The Union also sent appellants a notice on

Union letterhead, entitled "Notice to Interested Parties. No-

tice to all participants of application for determination of the

International Headquarters Pension and Beneficiaries Plan of

the International Union of Operating Engineers." Notice to

Interested Parties, reprinted in App. 13. The notice ex-

plained that the Union was applying to the IRS for a determi-

nation that its amended pension plan was eligible for tax-

qualified status. Id. It also stated that the recipient had the

right to submit comments to the IRS as to whether the plan

met the qualification requirements under the I.R.C. Id.

Appellants responded to the notice by submitting critical

comments to the IRS. They argued that while the amended

plan complied with ERISA's backloading requirements, the

old version of the plan -- which governed appellants' bene-

fits -- did not. The plan was supposed to satisfy one of the

statutorily available mathematical formulae, known as the "3-

percent method." See I.R.C. s 411(b)(1)(A). That method

requires that the accrued benefit to which each worker is

entitled on leaving the employer is not less than 3% of the

normal retirement benefit to which that worker would be

entitled if he or she began participation in the plan at the

earliest possible entry age and served continuously until the

earlier of age 65 or normal retirement age, multiplied by the

number of years of that worker's participation in the plan.

Id. According to appellants, the amended plan satisfied the

3% rule, because it allowed vested employees with less than

20 years of service to accrue benefits at the rate of 4% of final

pay for each year of service. Preliminary Written Comments

of John J. Flynn ... and James H. Thomas p 6, reprinted in

App. 15-19. Appellants alleged that the version governing

their benefits, however, had only allowed them to accrue

benefits at a rate of 2.25% of final pay, in violation of the

backloading requirement. Even worse, according to appel-

lants, the amended plan apparently did not go back and

correct the alleged violation with respect to former employ-

ees. Id. As a result, appellants argued that they were

"vitally affected by the potential ... violations committed by

the Plan." Id.

The IRS issued a favorable determination to the Union

regarding the amended plan, apparently without addressing

appellants' comments. Letter from IRS to Int'l Union of

Operating Eng'rs (Oct. 8, 1999), reprinted in App. 37-38.

Appellants responded by filing a petition in the Tax Court

seeking a declaration, under I.R.C. s 7476, that the plan was

not entitled to continuing qualification because it violated the

I.R.C. Petition (T.C. Dec. 2, 1999), reprinted in App. 3-8.

The IRS moved to dismiss the petition, arguing, inter alia,

that appellants lacked standing because they were former

employees and therefore not interested parties. Motion to

Dismiss for Lack of Jurisdiction, Docket No. 18090-99R (T.C.

Feb. 4, 2000), reprinted in App. 23-32. Appellants, in oppos-

ing the motion to dismiss, argued that they qualified as

interested parties by virtue of the fact that the Union had

sent them a notice addressed to interested parties or, alterna-

tively, because the regulations excluding former employees

were arbitrary and capricious. Notice of Petitioners' Opposi-

tion to Respondent's Motion to Dismiss, Docket No. 18090-

99R (T.C. Feb. 29, 2000), reprinted in App. 39-57.

The Tax Court dismissed the petition and held that appel-

lants lacked standing and were not interested parties. Order

of Dismissal for Lack of Jurisdiction, Docket No. 18090-99R

(T.C. July 31, 2000), reprinted in App. 67; Flynn, 80 T.C.M.

(CCH) at 93-94. The court held that under Treas. Reg.

s 1.7476-1(b), only present employees qualified as interested

parties. Flynn, 80 T.C.M. (CCH) at 93. Contrary to appel-

lants' argument, the Union could not confer jurisdiction on

the Tax Court by sending appellants a notice. Id. The Tax

Court also upheld the regulations under s 7476 as valid

legislative regulations. Id. at 93-94. Appellants appealed

the decision of the Tax Court.

II. Discussion

Our jurisdiction to review the decision of the Tax Court

derives from I.R.C. s 7482(a)(1) (1994). We review the legal

determinations of the Tax Court de novo. ASA Investerings

P'ship v. Comm'r, 201 F.3d 505, 511 (D.C. Cir.), cert. denied,

531 U.S. 871 (2000).

A. The Nondelegation Argument

On appeal, appellants raise the argument, not raised at the

Tax Court, that s 7476 violates the Constitution's nondelega-

tion doctrine. Having failed even to mention any constitu-

tional claim below, appellants now argue that s 7476 imper-

missibly delegates to the Secretary of the Treasury the

authority to determine which employees are interested par-

ties, without providing sufficient guidance to the Secretary as

to how to make that determination. Appellee argues in

response that because appellants failed to raise the issue at

the Tax Court, this court should not now consider it. Appel-

lee also argues that appellants' nondelegation argument lacks

merit. We agree with appellee on the former point and

therefore decline to address the latter.

Generally, an argument not made in the lower tribunal is

deemed forfeited and will not be entertained absent "excep-

tional circumstances." Marymount Hosp., Inc. v. Shalala, 19

F.3d 658, 663 (D.C. Cir. 1994) (citing Roosevelt v. E.I. Du

Pont de Nemours & Co., 958 F.2d 416, 419 n.5 (D.C. Cir.

1992)). This rule promotes efficiency and finality in the

administration of justice. See Johnston v. Reily, 160 F.2d

249, 250 (D.C. Cir. 1947). The rule is not absolute, and courts

of appeals have discretion to address issues raised for the

first time on appeal. Roosevelt v. E.I. Du Pont de Nemours

& Co., 958 F.2d 416, 419 n.5 (D.C. Cir. 1992) (citing Hormel v.

Helvering, 312 U.S. 552, 555-59 (1941)). We generally exer-

cise that discretion, however, only in exceptional circum-

stances, as, for example, in cases involving uncertainty in the

law; novel, important, and recurring questions of federal law;

intervening change in the law; and extraordinary situations

with the potential for miscarriages of justice. Id. (citations

omitted).

There are no exceptional circumstances in this case. Ap-

pellants argue that this court should consider its nondelega-

tion argument because it is vital to the proper functioning of

s 7476 as a mechanism for channeling the grievances of plan

participants regarding tax qualification decisions that affect

their benefits. Reply Br. for Appellants at 9. This argument

is not the least bit compelling. Under the existing regulatory

regime, employees may challenge all plan determinations and

former employees and other beneficiaries may challenge de-

terminations in cases involving plan terminations. This

scheme makes sense, in part because it is undisputed that

former employees rarely have reason to challenge determina-

tions regarding plan amendments, since amendments usually

affect only current and future employees. See id. at 16.

Furthermore, former employees are not without a remedy in

circumstances when they seek to challenge plan amendments,

for they may assert their claims through a civil action under

ERISA s 502(a), 29 U.S.C. s 1132(a) (1994 & Supp. V 1999).

We are unconvinced, therefore, that the issue now raised by

appellants is either sufficiently important or fraught with

sufficient risk of a miscarriage of justice to warrant deviation

from our general refusal to address issues raised for the first

time on appeal.

B. The "Interested Parties" Regulations

In I.R.C. s 7476, Congress expressly delegated authority to

the Secretary of the Treasury "to elucidate a specific provi-

sion of the statute by regulation." Chevron USA Inc. v.

Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984).

The legislative regulation promulgated pursuant to that ex-

plicit grant of authority is accorded controlling weight. As

the Supreme Court recently noted in United States v. Mead

Corp., 121 S. Ct. 2164, 2171 (2001):

When Congress has "explicitly left a gap for an agency to

fill, there is an express delegation of authority to the

agency to elucidate a specific provision of the statute by

regulation," Chevron, 467 U.S., at 843-844, 104 S. Ct.

2278, and any ensuing regulation is binding in the courts

unless procedurally defective, arbitrary or capricious in

substance, or manifestly contrary to the statute.

See also Arent v. Shalala, 70 F.3d 610, 616 (D.C. Cir. 1995)

(where there is no question that an agency had authority to

issue regulations under a statute, the only issue is whether

the agency's discharge of its authority is reasonable). There

is no doubt here that the Secretary promulgated a legislative

regulation pursuant to an express delegation of authority

from Congress. There are no procedural, substantive, or

statutory infirmities denigrating the regulation. Therefore,

under Mead, the regulation is binding.

By its plain language, the statute limits standing to "an

employee who has qualified under regulations prescribed by

the Secretary as an interested party." I.R.C. s 7476(b)(1).

As evidenced by this wording, the statute contemplates that

some employees will qualify under the regulations, while

others will not. Otherwise, there would be no need for the

Secretary to prescribe regulations setting forth the categories

of qualified employees.

In their briefs, the parties quibble over the significance of

the legislative history underlying the statute. Appellants cite

a report of a committee of the House of Representatives

suggesting that plan "participants" will be able to bring an

action, see H.R. Rep. No. 93-779, at 106 (1974) (Report of the

Committee on Ways and Means), while appellee counters that

the final Conference Report speaks only of "employees," see

H.R. Conf. Rep. No. 93-1280, at 331 (1974). This debate is

much ado about nothing. The statute's plain language clearly

shows that Congress did not intend for every participant to

have standing under s 7476. The only remaining question is

whether it was reasonable for the Secretary to exclude vested

former employees from qualification in situations involving

plan amendments.

Appellants do not deny that the statute authorizes the

Secretary to bar some employees from access to the declara-

tory judgment remedy, but they argue that it was unreason-

able to exclude all former employees automatically. They

suggest that the regulations should be revised to grant stand-

ing to any plan participant who can demonstrate that his

interests may be adversely affected by the grant or denial to

the plan of a favorable qualification determination. Br. for

Appellants at 27. Appellants may have a point in suggesting

that the regulations would have been better written to grant

standing to any participant with an interest at stake, rather

than granting standing based on a categorical distinction

between current and former employees. This does not mean,

however, that the existing regulations are arbitrary and un-

reasonable.

Appellants argue that the regulatory scheme is irrational,

because some former employees with no real stake in the

termination of a plan are nonetheless allowed to challenge it,

while all former employees are barred from challenging plan

amendments even when approval could adversely affect their

benefits. This example of alleged regulatory irrationality is

hardly convincing, for it focuses solely on the treatment of

different categories of former employees, not on the treat-

ment of former versus current employees. The example

therefore has little relevance to the instant case. Further-

more, the fact that some former employees may be able to

challenge determinations relating to plan terminations in

which they no longer have a stake does not mean that it is

irrational to exclude former employees where plan amend-

ments are concerned. Put another way, the fact that the rule

for plan terminations may be overinclusive does not necessar-

ily show that the rule for plan amendments is unreasonably

underinclusive.

In any event, the fact that the division between current and

former employees does not map perfectly onto the categories

of plan amendments and plan terminations does not render

the regulatory scheme irrational. First, appellants do not

dispute that former employees ordinarily are not affected by

amendments made to a plan after they terminate their em-

ployment. See Reply Br. for Appellants at 16. They also

acknowledge that regulatory simplicity and ease of adminis-

tration may have been among the Secretary's reasonable

objectives in drafting the regulations. Br. for Appellants at

27. We find nothing in the statute requiring the Secretary to

adopt an individualized, case-by-case approach to standing.

Nor does the statute rule out a categorical approach to

standing that corresponds roughly to categories of employees

whose interests are affected by plan terminations and amend-

ments respectively. If former employees are only rarely

affected by plan amendments made after their employment is

over, it is eminently reasonable to limit standing to current

employees, whose benefits will almost always be affected by

amendments.

Second, the regulatory distinction between current and

former employees does not leave the latter group entirely

without recourse when a plan amendment arguably affects

their benefits. As appellants recognize, they and other for-

mer employees in their position can seek redress by filing

civil actions under ERISA s 502(a), 29 U.S.C. s 1132(a).

Indeed, plan participants have had some success bringing civil

actions in district court to challenge violations of the back-

loading rules. See, e.g., Carollo v. Cement & Concrete Work-

ers Dist. Council Pension Plan, 964 F. Supp. 677, 682-84

(E.D.N.Y. 1997). In other words, it is not unreasonable for

the Secretary to issue regulations that leave former employ-

ees with one remedy, rather than two.

In sum, appellants' challenge to the regulations fails be-

cause they are unable to demonstrate that the basic division

between current and former employees in the plan amend-

ment context is arbitrary and capricious. The Secretary's

regulations need not perfectly accommodate all anomalous

situations in order to be reasonable under the statute, partic-

ularly when another remedy is available to those who are

excluded. Because the regulations are plainly consistent with

the statutory delegation to the Secretary and are based on a

reasonable division between present and former employees,

they are valid.

C. The "Notice" Regulations

Appellants' final argument is that, although they are not

interested parties under the regulations promulgated pursu-

ant to s 7476, the Union conferred standing on them by

mailing them a notice to interested parties. This argument is

premised on the requirement in 26 C.F.R.

s 601.201(o)(3)(xvi)(g) that the notice to interested parties

contain a statement that any person to whom the notice is

addressed is entitled to submit comments. Appellants argue

that under this regulation, the fact that the Union chose to

send appellants notice conferred interested party status upon

them. Br. for Appellants at 28-30. In essence, appellants

argue that Part 601 incorporates a waiver principle into the

s 7476 regulatory scheme, thereby creating an additional

category of people -- notice recipients -- who may employ

the statutorily provided declaratory judgment remedy. This

is a specious claim.

The regulation cited by appellants does not state that any

person to whom notice is addressed thereby becomes an

interested party entitled to institute a declaratory judgment

action. Rather, the regulation merely requires the notice to

provide that its recipient is entitled to submit comments on

the plan. Nowhere does the regulation suggest that notice

confers standing on recipients who are not interested parties

under Treas. Reg. s 1.7476-1(b). This construction of the

regulations accords with the overall regulatory structure:

Treas. Reg. s 1.7476 defines the interested parties under

s 7476, while Part 601 simply governs the content of the

notice that must be given to those interested parties when

plans seek determinations from the IRS. Part 601 acknowl-

edges that the notice must be given in accordance with the

regulations under s 7476. 26 C.F.R. s 601.201(o)(3)(xiv).

Taken together, ss 601.201(o)(3)(xiv) and (xvi)(g) do not sug-

gest that they add a new category of interested parties to

those enumerated in s 1.7476.

Even if Part 601 did appear to contradict the regulations

under s 7476 by adding a new category of interested parties,

it would not displace or override those regulations. We have

previously explained the weight to be accorded the procedural

rules of Part 601:

Part 601 rules differ significantly from the [Treasury]

regulations.... Issued by the Commissioner, without

need for approval by the Secretary, they serve merely as

guidelines for conducting the internal affairs of the agen-

cy. The authority of the Commissioner to issue such

rules derives from [5 U.S.C. s 301]. As such, the State-

ment of Procedural Rules is held to be directory, not

mandatory in nature.

Boulez v. Comm'r, 810 F.2d 209, 215 (D.C. Cir. 1987) (cita-

tions omitted). By contrast, the Treasury regulations defin-

ing "interested parties" are promulgated by the Secretary

pursuant to his specific statutory delegation in s 7476(b).

And as noted above, under the Supreme Court's decision in

Mead, Treas. Reg. s 1.7476 is binding as written. Part 601,

however, does not have the same status under Mead, so it

surely does not override s 1.7476. Thus, appellants' argu-

ments on this point are meritless.

III. Conclusion

As former employees, appellants are not interested parties

as defined by Treas. Reg. s 1.7476-1(b). As such, they lack

standing to bring a s 7476 declaratory judgment action. The

regulations defining interested parties are valid because they

are based on a reasonable construction of the statutory

language and because they are rooted in a rational distinction

between current and former employees in plan amendment

cases. Moreover, the rules governing the content of notice to

interested parties do not operate to confer standing on appel-

lants. For these reasons, we affirm the judgment of the Tax

Court.