Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21)

This morning, the Supreme Court released its opinions in CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here.  The main opinion is a unanimous opinion authored by Justice Kagan.  Justices Sotomayor and Kavanaugh joined the main opinion but also filed concurrences.

I have not studied the opinion, so offer at this time only the syllabus and a couple of quick comments:

Internal Revenue Service (IRS) Notice 2016–66 requires taxpayers and “material advisors” like petitioner CIC to report information about certain insurance agreements called micro-captive transactions. The consequences for noncompliance include both civil tax penalties and criminal prosecution. Prior to the Notice’s first reporting deadline, CIC filed a complaint challenging the Notice as invalid under the Administrative Procedure Act and asking the District Court to grant injunctive relief setting the Notice aside. The District Court dismissed the action as barred by the Anti-Injunction Act, which generally requires those contesting a tax’s validity to pay the tax prior to filing a legal challenge. A divided panel of the Sixth Circuit affirmed.

Held: A suit to enjoin Notice 2016–66 does not trigger the Anti-Injunction Act even though a violation of the Notice may result in a tax penalty. Pp. 5–16.

(a) The Anti-Injunction Act, 26 U. S. C. §7421(a), provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” Absent the tax penalty, this case would be easy: the Anti-Injunction Act would pose no barrier. A suit to enjoin a requirement to report information is not an action to restrain the “assessment or collection” of a tax, even if the information will help the IRS collect future tax revenue. See Direct Marketing Assn. v. Brohl, 575 U. S. 1, 9–10. The addition of a tax penalty complicates matters, but it does not ultimately change the answer. Under the Anti-Injunction Act, a “suit[’s] purpose” depends on the action’s objective purpose, i.e., the relief the suit requests. Alexander v. “Americans United” Inc., 416 U. S. 752, 761. And CIC’s complaint seeks to set aside the Notice itself, not the tax penalty that may follow  [*2] the Notice’s breach. The Government insists that no real difference exists between a suit to invalidate the Notice and one to preclude the tax penalty. But three aspects of the regulatory scheme here refute the idea that this is a tax action in disguise. First, the Notice imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty. Second, it is hard to characterize CIC’s suit as one to enjoin a tax when CIC stands nowhere near the cusp of tax liability; to owe any tax, CIC would have to first violate the Notice, the IRS would then have to find noncompliance, and the IRS would then have to exercise its discretion to levy a tax penalty. Third, the presence of criminal penalties forces CIC to bring an action in just this form, with the requested relief framed in just this manner. The Government’s proposed alternative procedure—having a party like CIC disobey the Notice and pay the resulting tax penalty before bringing a suit for a refund—would risk criminal punishment. All of these facts, taken together, show that CIC’s suit targets the Notice, not the downstream tax penalty. Thus, the Anti-Injunction Act imposes no bar. Pp. 5–13.

(b) Allowing CIC’s suit to proceed will not open the floodgates to pre-enforcement tax litigation. When taxpayers challenge ordinary taxes, assessed on earning income, or selling stock, or entering into a business transaction, the underlying activity is legal, and the sole target for an injunction is the command to pay a tax. In that scenario, the Anti-Injunction Act will always bar pre-enforcement review. And the analysis is the same for a challenge to a so-called regulatory tax—that is, a tax designed mainly to influence private conduct, rather than to raise revenue. The Anti-Injunction Act draws no distinction between regulatory and revenue-raising tax laws, Bob Jones Univ. v. Simon, 416 U. S. 725, 743, and the Anti-Injunction Act kicks in even if a plaintiff’s true objection is to a regulatory tax’s regulatory effect. By contrast, CIC’s suit targets neither a regulatory tax nor a revenue-raising one; CIC’s action challenges a reporting mandate separate from any tax. Because the IRS chose to address its concern about micro-captive agreements by imposing a reporting requirement rather than a tax, suits to enjoin that requirement fall outside the Anti-Injunction Act’s domain. Pp. 13–15.

JAT Comments:

1. I did a quick scan and search on the pdf that turned up no indication that the Court bought into the claim in the Court of Appeals’ decision that Treasury and the IRS (CIC Services LLC v. IRS, 925 F.3d 247, 258-259 (6th Cir. 2019):

do not have a great history of complying with APA procedures, having claimed for several decades that their rules and regulations are exempt from those requirements." Hickman & Gerska (sic), supra, at 1712-13.

See True or False: "Treasury and the IRS do not have a great history of complying with APA procedures" (Federal Tax Procedure Blog 8/5/20; 8/16/20), here.

2.  The Supreme Court opinion simply opens the door for the district court to consider whether an injunction or preliminary injunction should issue.  That will require that the Court consider the merits of the ultimate claim that CIC Services is making.  That claim is that (i) the IRS should have proceeded by notice and comment rulemaking (regulations) rather than by IRS Notice, and that (ii) the Notice is arbitrary and capricious for imposing new reporting requirements without proven need.  (See Slip Op. 4.)  Interestingly, in Mann Construction, Inc. v. United States (E.D. Mich. Dkt :20-cv-11307 Dkt 45 5/13/21), here, the Court dismissed a similar procedural challenge to Notice 2007-83 requiring taxpayers to disclose their participation in an allegedly abusive insurance arrangement or face substantial penalties under § 6707A.  The Court said (Slip Op. 15) that "The only remaining issue in this case is whether the IRS was required to provide public notice and an opportunity for comment before promulgating the Notice."  The Court had earlier held (Slip Op. p.16.) that the Notice adopted a legislative rule which would require notice and comment and held that the Government had not offered "any controlling authority for an exception to the notice and comment" requirement.  For purposes of this ruling, the Court addressed the latter issue and found that, while an express exception to notice and comment rulemaking was not statutorily prescribed, the context and history indicated that Congress intended that the notice and comment requirement not apply.  The Court concluded (Slip Op. 26):

this Court holds that Congress authorized the IRS to promulgate IRS Revenue Notice 2007-83 without notice and comment. It bears emphasizing that this holding is a narrow one. Plaintiffs’ briefing is riddled with appeals to the importance of APA rulemaking and to the plight of taxpayers who, according to Plaintiffs, would “have no protections [without] notice and comment.” ECF No. 42 at PageID.456. Even if “notice and comment [is] necessary to obtain the wisest rule,” id. at PageID.457, this Court cannot substitute its judgment for that of Congress, and no argument is advanced that Congress has exceeded its constitutional authority to legislate. 

The district court on remand will have to address this issue in considering whether a preliminary or permanent injunction can issue with respect to the micro-captive Notice in CIC Services.  (Note: The Mann Construction opinion came out on 5/13/21; a notice of appeal was filed the next day, on 5/14/21; the CourtListener docket entries are here; since there is likely not much of a record to assemble, the appeal through briefing should go fairly quickly.)

3. The ultimate issue that CIC Services raised is whether, under the APA, the Notice requirement was a legislative rule that could only be adopted with notice and comment rulemaking.  Requiring notice and comment rulemaking would defeat the purpose of such Notices designed to get information out to the public as to the IRS's position and to require information reporting immediately to deal with potential abuses.  I suppose that, if Treasury were required to make such rules in regulation format it could issue a 5 USC § 553(b)(B) "good cause" statement to make them immediately effective. 

4. Another issue lurking in the claim CIC Services makes that will be tested on remand as to the  legislative regulation status requiring either notice and comment or good cause statement is whether, if such pre-enforcement review is available for that procedural issue, a potentially affected party must bring the claim pre-enforcement or even post-enforcement within the six-year period of limitations in 28 USC § 2401(a).  Specifically, the question is whether a party in CIC Services position as a material advisor must bring the APA procedural challenge within that 6-year period or be precluded from doing so.  For example, individual A, a material advisor on a different potentially abusive scheme identified in an IRS Notice, (i) does not pursue pre-enforcement review, (ii) the IRS assesses three years later a massive § 6707A penalty he cannot pay to contest in a refund suit, and (iii) must await some other opportunity to contest (e.g., a CDP suit or an IRS collection suit which usually occurs toward the end of the assessment collection 10-year period).  If that later opportunity to contest--(iii) in the example--is beyond 6 years, will he be forever barred from making the claim that the Notice was procedurally improper legislative rulemaking?  I don't know the answer to that question but it does raise the question of whether any IRS rule that is subject to potentially procedural irregularity claims for being improper legislative rulemaking without notice and comment must be contested in the 6-year period.  Post-enforcement review well past the 6-year period in § 2401(a) has been allowed in tax cases, but now that pre-enforcement review for such APA procedural claims may be available will that change? 

5. I discuss the criminal tax aspect of the opinion on my Federal Tax Crimes Blog:  Supreme Court Opinion in CIC Services LLC On Risk of Criminal Penalty Aspects (5/17/21), here.

6. Other comments on CIC Services:

• Bryan Camp (Guest Blogger), Supreme Court Reverses the Sixth Circuit in CIC Services (Procedurally Taxing Blog 5/17/21), here.
• Leslie Book, Further Initial Thoughts on CIC Services (Procedurally Taxing Blog 5/18/21), here.
• Supreme Court Holds That Anti-Injunction Act Does Not Bar Pre-Enforcement Challenges To Reporting Mandates Backed By Both Tax Penalties And Criminal Punishment (Gibson Dunn 5/17/21), here (has succinct bullet points under heading What It Means.")
• Kristin E. Hickman, CIC Services, LLC v. IRS: Another Blow to Tax Exceptionalism (Notice & Comment 5/20/21), here.  (Professor Hickman's offering is excellent, but I disagree with claim about tax exceptionalism.  See Alice G. Abreu and Richard K. Greenstein,  Tax: Different, Not Exceptional, 71 Admin. L. Rev. 663 (2019), here.  I don't think Professor Hickman's use of the "tax exceptional" notion is important to the points she makes in the excellent posting.)

7. Also, although a bit off-topic, I strongly recommend a recent article that develops the history of the politicization of the deference issue.  Craig Green, Deconstructing the Administrative State: Chevron Debates and the Transformation of Constitutional Politics, 101 Boston U. L. Rev. 619 (2021), here.

8. On the use of Syllabuses for research and even clarifying Supreme Court Opinions, see Supreme Court Opinion Syllabus as Persuasive Authority? (Federal Tax Procedure Blog 2/8/21), here.

Note:  Paragraph 2 above was added on 5/17/21 8:30pm.  Paragraphs 2 and 3 were added on 5/18/21 10:30am.  Another item was added to paragraph 6 at 5/18/21 10:30am.  Yet another items was added to the list in paragraph 6 on 5/21/21 11:15am.