First Circuit Holds that Target of JDS May Bring Challenge to JDS Prior to Tax Enforcement Against Target (11/9/22)

I am late posting on Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), 1^st Cir. here and GS here. So the principal point of this blog is to point to the excellent writings of others, which I provide below.

The basic holding of the case (as I understand it) is that, based on CIC and Direct Marketing, the Anti-Injunction Act, § 7421(a) (“AIA”)) does not apply to IRS actions to gather information as opposed to actions to assess and collect tax. As a result, under CIC, a taxpayer can have pre-enforcement review challenging the validity of the JDS and the resultant unlawful acquisition and retention of his financial information, on the notions that; (i) the APA § 702 contemplates pre-enforcement review of IRS information gathering activity (as opposed to assessing or collecting activity) and (ii) the ex parte John Doe Summons (“JDS”) is an information gathering function rather than a tax assessing or collecting function.

My only comment is that the underlying issue as to whether a taxpayer can get pre-enforcement review of the validity of a JDS is an important one.  The holding seems to portend a wide swath of pre-enforcement challenges in various other IRS information-gathering activities.  In a comment posted to a  PT Blog, I asked (cleaned up for typos):

Does this mean that the AIA does not apply to a third party recordkeeper summons (which may be analogized in functionality to a John Doe Summons)? Or even a regular IRS summons?

 All of these types of summonses are issued for information that might lead to an assessment.

 What about other audit activities?

Here are the links to other good offerings on Harper v. Rettig. 

•  Leslie Book, First Circuit Finds Anti-Injunction Act Does Not Bar Challenge to IRS’s Use of John Doe Summons That Gathered Taxpayer’s Virtual Currency Transactions (Procedurally Taxing Blog 8/19/22), here.
• Leslie Book, 11th Circuit Affirms That Anti-Injunction Act Prevents Taxpayer Seeking Access to Appeals (Procedurally Taxing Blog 8/26/22), here, (noting that “The logical conclusion of the First Circuit’s approach in Harper v Rettig is a much more permissive use of courts to challenge all sorts of IRS actions in the course of the IRS’s attempt to gather information, not just those that arise in connection with the issuance of a John Doe summons.”).
• Sandra R. Brown and Gary Markarian, First Circuit in a Cryptocurrency Summons Enforcement Case Widens the Crack Created in the Anti-Injunction Act by CIC Services, LLC, v IRS (Tax Litigator Blog 8/30/22), here.

The Government filed a petition for rehearing.  See Leslie Book, Harper v Rettig Update: Government Petitions For Rehearing (Procedurally Taxing Blog 10/11/22), here (with a link to the petition for rehearing.)  The petition was denied in November 2022.  It will be a while before the Solicitor General decides whether to petition for writ of certiorari.

Added 11/12/22 3:00pm:

In Silver v. IRS (D. D.C. Case No. 20-1544 (CKK) Memo Op. 11/7/22), TN here and CL here, the district court rejected Silver's attempt to reject regulations that, Silver claimed, had not been given a required final regulatory flexibility analysis under the Regulatory Flexibility Act, 5 U.S.C. § 601 et seq.  The complaint related to "regulations effecting the TCJA’s provisions revising the “global intangible low-taxed income” (GILTI') of certain “controlled foreign corporations.'"  I won't get into GILTI, but since this appeared to be a procedural challenge, the issue was whether the AIA had no applicability and the challenge could proceed under the APA. The court rejected the claim (Slip Op. pp. 7-9) and distinguished Harper v. Rettig (Slip Op. 9):

Certainly, the regulation at issue here actually imposes tax obligations; it [*9] is not, for example, concerned only with “the IRS’s continued retention of [a taxpayer’s] personal financial information” as a function of “information gathering.” See Harper v. Rettig, 46 F.4th 1, 8 (1st Cir. 2022) (applying CIC, concluding that AIA did not bar such a challenge). At the same time, reading the complaint’s requested relief, it is, in actuality, “a challenge to the assessment or collection of a tax itself.” See Franklin v. United States, 49 F.4th 429, 434 (5th Cir. 2022) (applying CIC, AIA barred claim that penalty assessments were invalid under Administrative Procedure Act because injunctive relief would effectively bar collection of penalty tax). The complaint asks that the Court “[d]efer enforcement of the final rule against Plaintiff and all other small entities until such time as the Court finds” the IRS has complied with applicable procedural requirements. Compl. at 14. Pursuant to the TJCA, the IRS must, among other things, promulgate “rules for the application of” some portions of the GILTI tax as defined by statute. See 26 U.S.C. § 951A(f)(b). The IRS did precisely that in the challenged regulations, further defining what entities are subject to GILTI and what amount must be paid. If the Court “defers enforcement” of the challenged regulations, then it enjoins the IRS and Treasury from collecting a tax in an amount and from entities that it has determined must pay the requisite amounts.