Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.I have not spent a lot of time on this blog addressing the Anti-Injunction Act (“AIA”), § 7421(a), or the parallel tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201, which generally is interpreted coterminously with the AIA. With this acceptance of certiorari, the AIA will likely be a large topic of interest in the near future, although a decision will not likely appear until 2021.
For the time being , I cut and paste some excerpts from the current working draft of my Federal Tax Procedure Book (footnotes omitted, but the footnotes are offered in a pdf version here):
Excerpts from Working Draft of Federal Tax Procedure Book, for August 2020 Publication.
a. Litigating IRS Interpretations and Other Guidance.
For most agency guidance, particularly guidance in a binding format such as legislative regulations, affected parties have an opportunity to raise procedural challenges in court under the APA upon promulgation of the guidance and before the agency attempts to enforce the guidance against the affected parties. The statute of limitations for such review is the general six-year statute of limitations in 28 U.S.C. § 2401(a). However, for Treasury guidance documents (both regulations and subregulatory), such pre-enforcement litigation challenges are prohibited under the Anti-Injunction Act (“AIA”), § 7421(a), and related statutory and common law prohibitions (discussed below starting on p. ?) which have historically channeled tax litigation, including challenges to agency guidance, into post-enforcement litigation venues such as deficiency, refund or collection suits. Those post-enforcement venues have their own statutes of limitations triggered by the enforcement being challenged (e.g., a deficiency notice, denial of a claim for refund, or collection action). Accordingly, historically, litigation challenging IRS agency guidance has not been allowed for pre-enforcement procedural challenges. If § 2401(a) were applicable, post-enforcement review would not be adequate for APA procedural challenges in tax litigation because, in most cases, the six-year statute would have expired before IRS enforcement action made the case ripe for the traditional tax challenge venues. As a result, the general six-year statute of statute of limitations in § 2401(a) has not barred procedural challenges to IRS guidance in post-enforcement cases outside the six-year period in § 2401(a).
Notwithstanding the foregoing, in 2020, the Supreme Court accepted certiorari in CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den. 936 F.3d 501 (6th Cir. 2019) to address the following question:
Whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes also bars challenges to unlawful regulatory mandates issued by administrative agencies that are not taxes.The IRS “regulatory mandate” in question was Notice 2016-66 designating section 831(b) micro-captive transactions” as transactions of interest, thereby imposing a reporting requirement on all such transactions and their advisors. The Notice was not issued with notice and comment. CIC sought to challenge the Notice in advance of any actual enforcement against CIC. There will undoubtedly be more learning on this subject in the next edition of this Book.
* * * *
B. Injunctions in Tax Litigation.
1. Against the Government.
a. General Rule - No Injunctions § 7421(a) (AIA).
Section 7421 broadly prohibits suits “for the purpose of restraining the assessment or collection of any tax * * * by any person, whether or not such person is the person against whom such tax was assessed.” Such suits are commonly called injunction suits but also cover any suit that functions like an injunction. Section 7421(a) is also called the Anti-Injunction Act, and acronymed to “AIA”; the AIA should not be confused with the parallel prohibition for injunctions in state tax matters in 28 U.S.C. § 1341 (often called the Tax Injunction Act and acronymed to “TIA.”) The reasons for prohibition on suits to interfere in tax matters are (1) there is a strong governmental imperative in avoiding interference with the revenue function and (2) there are adequate procedures otherwise provided in which taxpayers can contest tax liabilities without undue burden.
So, what is a tax subject to the prohibition on injunctions? There is no comprehensive definition of tax for this purpose. It is probably at least any exaction in the Internal Revenue Code, and certainly those labeled or treated in the Code as a tax. E.g., § 6665(a) (providing that, except as otherwise provided in the Code, “any reference to ‘tax’ imposed by this title shall be deemed also to refer to the additions to the tax, additional amounts, and penalties provided by this chapter,” which covers the principal penalties discussed above). But, if some exaction is not labeled a tax but is treated as a tax for some purpose, is there room for not calling it a tax for AIA purposes?
In National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), the Court held that a penalty in the Affordable Care Act (also popularly called Obamacare) was a tax for purposes of the taxing power in the constitution but was not a tax for purposes of the AIA. I won’t get into the reasoning for making the penalty a tax under the taxing power. But, once justified as a tax, how did the penalty escape the AIA? The Court held, based on a holistic interpretation of the ACA, that Congress did not intend the penalty as a tax for purposes of the AIA. The Court reasoned that the AIA, a statutory and not a constitutional provision, prohibited injunctions against exactions Congress intended as taxes in a statutory sense rather than a constitutional sense. Congress could certainly call an exaction a tax and not include it within the scope of the AIA. From there it is a short or long leap–depending on perspective–to determine through statutory interpretation that a particular exaction not called a tax but justified as a tax not within the AIA prohibition. This penalty, while constitutionally a tax, was not legislatively a tax within the meaning of the word in the AIA. (I hope I have summarized the holding fairly, but query whether that leaves some room for some of the exactions in the Internal Revenue Code to avoid the AIA.) Finally, to close the loop on the Supreme Court case, by avoiding the injunction prohibition, the Court had jurisdiction over the constitutional challenge against the ACA and could reject it on the merits because it was within the scope of the taxing power.
The prohibition applies textually to suits restraining “assessment” or “collection.” The IRS performs many actions not formally rising to acts of assessment or collection. For example, before making assessments, the IRS may investigate (via audit); and before taking collection action, the IRS may also investigate. Is such investigative activity, though not formally assessment or collection covered by the AIA? Yes. The AIA’s prohibition reaches to block suits seeking to prevent activities leading to and culminating in assessments or collections.
b. Exceptions.
The key exceptions that I will expect you to know are (i) certain specifically enumerated exceptions in § 7421(a), (ii) a judicial exception, referred to as the Enochs v. Williams Packing Company exception, and (iii) another judicial exception narrowly delimited where the person affected by the tax has no remedy to contest liability.
(1) Statutorily Enumerated Exceptions.
Section 7421(a) contains a flat prohibition against a “suit for the purpose of restraining the assessment or collection of any tax."” This means, of course, no injunctions. Section 7421(a), however, enumerates certain exceptions. I expect you to know certain exceptions for this class, and encourage you to think about why the exceptions exist.
Let me start with the enumerated exception for § 6213(a). You certainly recall that § 6213(a) is a key Code Section in this class. Briefly, it is the section that creates restrictions on assessment -- specifically a prohibition on assessment until the IRS has first issued a notice of deficiency and waited 90 days during which the taxpayer can petition the Tax Court and then further prohibits assessment during the period a Tax Court case is pending. This prohibition on assessment is an essential feature of an effective prepayment remedy, without it the IRS could assess and begin collection measures. What is the taxpayer's remedy if the IRS, despite the prohibition on assessment, makes the assessment and begins collection measures? The remedy appears in § 6213(a)’s specific provision for an injunction suit (including an order for a refund for taxes paid pursuant to an improper assessment) and § 7421(a)'s carving out of § 6213(a) from the general flat prohibition on injunctions.
But, those of you who are both familiar with the law of remedies and the federal tax scheme allowing refund suits to contest tax liabilities, should easily spot that there is a further issue lurking here. What if the taxpayer in an injunction suit alleges only that the IRS assessed without issuing a notice of deficiency–a clear violation of § 6213(a)–but cannot allege or has not alleged the traditional bases for equitable injunction relief - irreparable injury and lack of adequate remedy at law? For example, what if the taxpayer has ample money to pay the taxes wrongfully assessed and thus could litigate in a refund suit? Can the taxpayer sue for injunction under § 7421(a)? The taxpayer has a remedy at law–pay the amount assessed and sue for refund. There is a split in the circuits. However, given the importance of the Code's scheme to allow a prepayment remedy which requires the issuance of a notice of deficiency, the better view is that the injunctive remedy is allowed by § 7421(a).
Examples of other exceptions are: (1) injunctions to allow the special Tax Court proceeding for innocent spouse claims to proceed without the threat of assessment and collection actions; (2) injunctions to allow the partnership unified audit proceedings to work at the partnership level before assessment and collection action is taken at the partner level (for discussion of these procedures, see below (pp. 882 ff.)); and (3) injunctions in responsible person penalty cases (also referred to as trust fund penalty cases) where the IRS has not given the required notice under § 6672(b)). The pattern for the exceptions is that Congress has prescribed certain administrative or judicial proceedings or actions that should precede assessment and levy and failure to let those processes play out justifies excepting them from the prohibition on injunctions.
For purposes of this course, I want you to focus on the exception for failure to satisfy § 6213(a)'s restrictions on assessment. In your subsequent practice, of course, you should think about the other exceptions in § 7421(a) where the need arises.
(2) Enochs v. Williams Packing Exception.
As mentioned above, there is a nonstatutory exception to § 7421(a)'s general prohibition on injunctions. This is the Enochs v. Williams Packing exception, named after Enochs v. Williams Packing & Navigation Co., 370 US 1, 6 (1962). The case holds that if the situation is quite extreme and it is clear, virtually on the face, that the IRS cannot prevail, a court may enjoin. The court stated the predicates for such a suit: (1) it must be “clear that under no circumstances could the government ultimately prevail...on the basis of information available to it at the time of the suit. [taking] the most liberal view of the law and the facts” and (2) “equity jurisdiction otherwise exists” -- meaning there must be irreparable harm and no adequate legal remedy exists. With regard to the latter, note that the comprehensive system for litigating tax liabilities (the notice of deficiency and Tax Court procedure) without paying and the opportunities to litigate in the district court (with the mitigations of the Flora rule), will often make it very difficult for taxpayers to satisfy the requirement that equity jurisdiction otherwise exists. Even where there is no prepayment remedy, the mitigations to the full payment rule (e.g., in the case of employment taxes, paying for one employee for one quarter) results in an adequate remedy.
I noted that it is usually difficult to clear the hurdles of Enochs v. Williams Packing. However, the potential for success is illustrated in a case that is not without controversy. In Estate of Michael v. Lullo, 173 F.3d 503 (4th Cir. 1999), involving the estate tax, the estate had been audited, received an estate tax closing letter (not a closing agreement), and paid the amount (i) by a credit for tax paid to England and (ii) by check for the balance. The statute of limitations expired. The IRS then discovered that it had omitted from its calculations in the closing letter certain assets in certain schedules and, recognizing that the statute of limitations prevented further assessments, sought a partial solution by denying the credited English tax, thus, if it worked, reinstating that amount of the assessment to which the foreign credit had been applied. In other words, no new assessment was made, just a reversal of part that had been paid by the English tax credit. The taxpayer then sued for mandamus to order the IRS to acknowledge the amount of English tax claimed as a credit. The district court denied the mandamus action based on the AIA. On appeal, the Fourth Circuit reversed, ordering the mandamus under the Enochs v. Williams Packing exception. The Court said “The Estate's action is precisely the rare type of suit for which this exception was crafted.” The Court based the conclusion on the following steps (which I highly summarize at the risk of misstating the nuances): (i) the IRS conceded that the taxpayer was entitled to the English tax credit that it was seeking to reduce; (ii) the statute of limitations was closed for any further assessments; (iii) since the IRS did not assess the taxes it now sought to collect, whether or not in an academic sense the taxpayer owed additional taxes is irrelevant, for the statute not only bars the IRS from a remedy, it affirmatively extinguishes liability for taxes not assessed timely (hence the taxes resulting from the IRS omission of assets on the schedules are simply nonexistent); (iv) the Lewis v. Reynolds right to offset in refund suits is inapplicable because that case only permitted the IRS to retain additional otherwise due taxes but did not give it the right to go out and collect them as it was attempting to do here; and, (v) even apart from Lewis v. Reynolds, the IRS gambit short-circuited general procedure for notice of deficiency and right to contest in the Tax Court and thus relegating the IRS to a refund suit that was inconvenient and where the IRS would eventually lose. So reasoned the majority on the panel.
The dissenter in Estate of Michael excoriated the majority’s holding based on“frontier instincts.” The dissenter says, in part, that Enochs v. Williams Packing required that it be clear or certain that the taxpayer would prevail in any otherwise adequate proceedings, but in a refund suit that is otherwise adequate Lewis v. Reynolds makes it far from certain that the taxpayer could prevail. (It is black letter law that the mere inability to prevail in a subsequent otherwise adequate proceeding does not meet the Enochs v. Williams Packing exception.)
But don’t get hung up on the scope of Lewis v. Reynolds at this point, and think about why the taxpayer’s case in Estate of Michael was so compelling to persuade at least a majority on the panel to invoke the Enochs v. Williams Packing exception.
(3) No Other Remedy - South Carolina v. Regan.
In South Carolina v. Regan, 465 U.S. 367 (1984), the Court seemed to carve out a remedy by reading the AIA as applying only where the person affected by the tax had some other remedy. The Court said: “In sum, the Anti-Injunction Act's purpose and the circumstances of its enactment indicate that Congress did not intend the Act to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy.” The scope of this exception is not fleshed out, because in most of the cases applying the AIA, the person is the taxpayer with the standard refund suit remedy, as well as deficiency procedures where applicable, and ability to contest in collections suits and collection due process.
c. Declaratory Judgments and Other Injunction Substitutes.
The law of remedies offers potential remedies that might have an equivalent effect to interfere with the revenue function much as an injunction would. Hence, it is not surprising that such other remedies are prohibited, either expressly in the statute or by court interpretation, except in certain narrowly prescribed contexts in which Congress intended those other remedies to apply.
The most obvious similar remedy is the declaratory judgment remedy which could have the same practical effect even though it would be just a pronouncement of legal rights. The statute expressly excepts tax matters from the declaratory judgment remedy. Notwithstanding this general prohibition, Congress has provided certain limited authority for courts to confer declaratory judgment relief. The Tax Court is given certain declaratory judgment authority with respect to, for example, certain exempt organization qualification.
Other remedies that might achieve a similar revenue-inhibiting effect are similarly prohibited except where expressly allowed by statute.
JAT Comment on CIC Servs:
1. In the petition for certiorari p. 6, the petitioners assert:
Throughout this case, the IRS has never meaningfully disputed that Notice 2016-66 is a substantive, legislative-type rule subject to the APA’s notice-and-comment requirements.I have not tracked the course of the litigation prior to the petition, but I doubt seriously that the IRS did not meaningfully dispute that the Notice is a legislative-type rule. Legislative rules are subject to the APA's compulsory notice and comment requirements. The IRS did not issue the Notice in question with notice and comment. Hence, if the Notice were a legislative rule, it would be facially illegal and CIC Servs would have won the case from the starting block. In the brief in opposition to certiorari, the Government engaged on the issue only by saying that that was the taxpayer's claim. (Brief in Opp. p. 8.) Perhaps there will be more discussion in the merits briefs and the opinion(s), but the taxpayer's claim is, I think, incorrect.
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