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.