11th Circuit Holds that a Taxpayer Motion for Injunctive-Type Relief in a Closed Case Is Not Subject to § 7421(a), the AIA (9/27/22)

In United States v. Meyer, 50 F.4th 23  (11th Cir. 9/26/22), CA11 here and GS here, the Court outlines the issue in its opening paragraph:

    The Anti-Injunction Act, 26 U.S.C. § 7421(a), provides in relevant part that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person[.]” The question before us is whether the Act bars a defendant from moving—in an action initiated by the government—for a protective order to restrain the government from using his responses to requests for admission when assessing a tax penalty in a separate administrative proceeding. Because moving for a protective order in an action filed by the government does not amount to maintenance of a “suit,” we hold that the Act does not apply.

The Court then offers some more factual detail (Slip Op. 2-4):

             In 2018, the government filed a complaint against Michael L. Meyer, alleging that he promoted a tax evasion scheme in which he advised his clients to claim unwarranted federal income tax deductions for bogus charitable donations. The government sought to enjoin him from operating his business, as well as disgorgement of all of the proceeds from his scheme. Over the course of the next year, the parties engaged in extensive discovery. As relevant here, the government served over 1,500 requests for admissions upon Mr. Meyer under Federal Rule of Civil Procedure 36. Mr. Meyer answered the requests with the assistance of counsel.

            Mr. Meyer eventually settled with the government and agreed to a permanent injunction prohibiting him from, among other things, representing anyone other than himself before the IRS; preparing federal tax returns for others; or furnishing tax advice regarding charitable contributions. On April 26, 2019, the district court entered a final permanent injunction against Mr. Meyer and closed the case. The order did not include any language regarding the confidentiality or future use of discovery-related materials.

            On July 24, 2020, Mr. Meyer received a notice from the IRS informing him that he owed millions of dollars in penalties in connection with his promotion of an abusive tax shelter. See 26 U.S.C. § 6700. The notice included an attached Form 866-A, Explanation of Items, which detailed the basis of the IRS’ decision. The Explanation of Items specifically relied on Mr. Meyer’s Rule 36 admissions, obtained in the 2018 tax case that had been filed by the government. Those admissions were also attached as a composite exhibit.

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:

Certiorari Granted in CIC Servs on AIA Application to Pre-enforcement Guidance Challenges (5/12/20)

I have previous written on CIC Services LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh. den.  936 F.3d 501 (6th Cir. 2019).  See CIC Servs Petition for Rehearing En Banc Petition Denied with Hyperbolic Concurring and Dissenting Opinions (Federal Tax Procedure Blog 8/29/19; 8/31/19), here.  The Supreme Court granted certiorari in May 4, 2020 to consider the following issue ((See SCOTUSBLOG page on the case, here):

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.

When Is A Tax Not a Tax? When the Supremes Says It Is Or Not! (8/2/12)

In National Federation of Independent Business v. Sebelius,  567 U.S. ___ (2012), here, the Supreme Court affirmed the individual mandate as a tax but held that it was not a tax for purposes of the Anti-Injunction Act ("AIA"), 26 USC 7421(a), here, which prohibits injunctions against a tax assessment or collection.  What's that all about?  I won't try to answer that question in detail, but I will introduce readers to the back ground of the AIA.

The statute is:

§ 7421 - PROHIBITION OF SUITS TO RESTRAIN ASSESSMENT OR COLLECTION
(a) Tax.   Except as provided in sections 6015 (e), 6212 (a) and (c), 6213 (a), 6225 (b), 6246 (b), 6330 (e)(1), 6331 (i), 6672 (c), 6694 (c), and 7426 (a) and (b)(1), 7429 (b), and 7436, no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

In the text book I summarize the AIA as follows:

Injunctions or injunction substitutes (such as declaratory judgments) are not allowed in tax controversies.  § 7421(a) (Also called the Anti-Injunction Act).  The reasons 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.

(I have just "lifted" the citation to Section 7421(a) the text from a footnote where it formerly appeared.)

You will note that there are certain statutory exceptions to the prohibition (see the opening "Except as" clause).  The exceptions do not swamp the rule but they are significant.  In the Tax Procedure course we cover some of these exceptions.  For example, the notice of deficiency giving the taxpayer pre-assessment access to the Tax Court for income and estate and gift tax is an exception (see the reference in Section 7421(a) to Sections 6212 and 6213); if the notice is not sent or not properly sent (e.g., to the taxpayer's last known address), the taxpayer may enjoin any IRS assessment and attempt to collect the tax.  (We will study also certain more efficient alternatives to remedying this particular problem, but the injunction suit is available.)  There are other statutory exceptions, but for present purposes just note that there is a general prohibition on injunction suits unless there is an exception.  There is also a judicially-created exception applicable only in rare cases of clear unconstitutionality, but again that should not detract from the general rule.  I discuss the AIA and the exceptions in the texts as follows:  (i) footnoted version, pp. 525 ff; (ii) nonfootnoted version, pp. 387 ff.  (I also mention in the footnotes the AIA in discussing the exceptions, such as the exception for failure to send a proper notice of deficiency.

Where applicable, the AIA means that a tax cannot be enjoined.  This will mean, generally, that the, for taxes other than those requiring a notice of deficiency, the taxpayer must first pay the tax and then litigate the taxpayer's liability for the tax.  As applicable to the individual mandate which does not require a notice of deficiency, that would mean that a taxpayer / citizen must first pay the tax which does not kick in until 2014 and then litigate liability.