January 23, 2018

January 23, 2018

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January 22, 2018

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Administrative Procedure Act (APA) Challenge to Notice of Deficiency in Tax Court: QinetiQ Affirmed

On January 6, 2017, the US Court of Appeals for the Fourth Circuit, by published opinion, affirmed the US Tax Court’s (Tax Court) earlier ruling in QinetiQ US Holdings, Inc. v. Commissioner.  We previously wrote about the case here, here, and here.  To refresh, the taxpayer had argued in Tax Court that the Notice of Deficiency issued by the Internal Revenue Service (IRS), which contained a one-sentence reason for the deficiency determination, violated the Administrative Procedure Act (APA) because it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”  The APA provides a general rule that a reviewing court that is subject to the APA must hold unlawful and set aside an agency action unwarranted by the facts to the extent the facts are subject to trial de novo by the reviewing court. The Tax Court disagreed, emphasizing that it was well settled that the court is not subject to the APA and holding that the Notice of Deficiency adequately notified the taxpayer that a deficiency had been determined under relevant case law.  The taxpayer appealed to the Fourth Circuit.

In an opinion written by Circuit Judge Barbara Keenan, the court concluded that the IRS complied with all applicable procedural requirements.  The court reasoned that the Internal Revenue Code (Code) provided a unique system for judicial review that should govern the content requirements for a Notice of Deficiency.  Per the court, it “is that specific body of law, rather than the more general provisions for judicial review authorized by the APA, that governs the content requirements of a Notice of Deficiency.”  The court cited a Fourth Circuit opinion from 1959, in which it held that the Code’s provisions for de novo review are incompatible with limited judicial review of final agency actions allowed under the APA.

The court held that the APA’s requirement of a reasoned explanation in support of a “final” agency action does not apply to a Notice of Deficiency issued by the IRS.  A Notice of Deficiency, the Court reasoned, cannot be a “final” agency action within the meaning of the APA, because the agency action is not one “by which rights or obligations have been determined, or from which legal consequences will flow.”  After issuing a Notice of Deficiency, the IRS may later assert in Tax Court new theories and allege additional deficiencies.  Moreover, a taxpayer may also raise new matters in Tax Court.  In addition, the court cited to the Supreme Court’s 1988 opinion in Bowen v. Massachusetts, emphasizing that Congress did not intend for the APA “to duplicate the previously established special statutory procedures relating to specific agencies.”

The court also held that the Notice of Deficiency issued to QinetiQ satisfied the requirement of Code section 7522(a), which requires that the IRS “describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties.”  The court explained that the Notice of Deficiency informed QinetiQ that the IRS had determined a deficiency in an exact amount for a particular tax year and that QinetiQ could contest the deficiency determination in court.  The court also discerned no prejudice to QinetiQ, in light of QinetiQ’s burden to show entitlement to a particular deduction.  The court acknowledged that different US Courts of Appeals have invalidated Notices of Deficiency for insufficient stated reasoning.

Practice Point:  Unlike recent APA arguments in other tax contexts, such arguments relating to insufficient reasoning in a Notice of Deficiency have not been well-received.  Yet, as the court acknowledged, the Code’s requirements may still help safeguard taxpayers who receive insufficiently explained IRS determinations.  Taxpayers should review any IRS determinations carefully to determine whether a procedural challenge may be beneficial, including but not limited to shifting the burden of proof to the IRS.

© 2018 McDermott Will & Emery


About this Author


Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling...

Jeffrey M. Glassman, McDermott Will Emery, Tax Controversies Lawyer

Jeffrey Glassman is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm's Dallas office.

Jeffrey focuses his practice on defending individuals and businesses in all stages of federal civil and criminal tax controversies, including litigation, U.S. Internal Revenue Service (IRS) examinations, administrative appeals and voluntary disclosures.

Jeffrey was a law clerk to Judge Maurice B. Foley of the U.S. Tax Court.


  • Representing multinational businesses and individuals in Tax Court, district court and appellate litigation.
  • Representing multinational businesses in IRS examinations of restructuring transactions.
  • Representing multinational businesses in IRS voluntary disclosures relating to withholding and information reporting obligations.
  • Favorably resolved employment tax matters relating to periods when former parent entity was responsible for payroll and tax compliance.
  • Successfully and timely resolved significant corporate employment tax disputes with full interest and penalty abatement.


  • Co-Chair Dallas Chapter, Federal Bar Association, Section on Taxation
  • Member, American Bar Association Tax Section
  • Member, State Bar of Texas Tax Section
  • Participant, State Bar of Texas Tax Section Leadership Academy
  • Member, Dallas Bar Association Tax Section


Jeffrey is admitted to practice in the District of Columbia, Texas and before the U.S. Tax Court.