Tax Advisors Victorious Over IRS In Supreme Court Ruling

SUPREME COURT RULINGS

According to an article posted in Forbes yesterday:

“In a unanimous opinion written by Justice Kagan, CIC Services, LLC v. Internal Revenue Service et al, the Supreme Court held that taxpayers’ advisors have the right to sue the IRS to set aside or invalidate IRS Notices. The decision isn’t as revolutionary as the Boston Tea Party, but it gives tax advisors a legal right to contest – or “protest” – IRS enforcement of Notices that seek to impose penalties, and may open the door for taxpayers to directly contest such notices in the future.”

SUPREME COURT OF THE UNITED STATES
Syllabus
CIC SERVICES, LLC v. INTERNAL REVENUE SERVICE ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE SIXTH CIRCUIT

No. 19–930. Argued December 1, 2020—Decided May 17, 2021
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 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.
925 F. 3d 247, reversed and remanded.

KAGAN, J., delivered the opinion for a unanimous Court. SOTOMAYOR, J., and KAVANAUGH, J., filed concurring opinions.

Read Supreme Court Opinion

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1 comment on “Tax Advisors Victorious Over IRS In Supreme Court Ruling”

  • Justice Kagan’s decision in the CIC Services case has (I believe) far broader application than is suggested by many advisors. Of particular significance are two parts of her decision:

    1. On the origins of the Anti-Injunction statute at page 4:

    Congress responded by enacting the Anti-Injunction Act. See Act of Mar. 2, 1867, §10, 14 Stat. 475. In its current form (differing little from the original), the Act provides: “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any
    person.” 26 U. S. C. §7421(a). The Act, we have stated, “protects the [Federal] Government’s ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes.”

    Clearly when the Anti-injunction statute was enacted, the Revenue laws were about collecting revenue. At that time the Revenue laws simply did not include the massive “reporting” and “procedural rules” that permeate today’s Internal Revenue Code. In fact, the growth of Government spawned the growth of Administrative Law, a hugely important kind of law today. Note that these rules and procedures are found in the tax statute even though many of them do not generate taxes at all. To put it another way: The fact that a reporting obligation is found in the Internal Revenue Code is does not mean that it is a tax. The Anti-injunction statute clearly did not contemplate the growth of the administrative/regulatory state that defines the 21st Century. The government in both this CIS case and the Silver transition tax lawsuit, seems to take the position that the fact of inclusion in the Internal Revenue Code makes a reporting requirement a tax (and therefore immune to challenge). Justice Kagan and a majority of the Supreme Court have clearly rejected that position.

    2. Her reasoning is summarized page 17:

    “One last time:

    CIC’s action challenges, in both its substantive allegations and its request for an injunction, a regulatory mandate—a reporting requirement—separate from any tax. Or said otherwise, the suit targets not a regulatory tax, but instead a regulation that is not a tax. Here, the tax functions, alongside criminal penalties, only as a sanction for noncompliance with the reporting obligation.”

    So where are we are and what does this mean?

    Although this decision is based on the specific facts, I do NOT interpret this to be a narrow decision. The decision reinforces the principles that:

    A. Congress has broad jurisdiction to enact tax laws. In general the tax aspect of the laws are protected from challenge under the Anti-injunction statute.

    B. When enacting those tax laws, the Government must comply with a legal regime that requires that the procedure and process of enforcing tax laws must meet certain legal standards. The jurisdiction to enact a tax does not absolve the government from from the requirement of adherence to principles of administrative (and other laws).

    I note that CIC may not be successful in the lawsuit it has tried to bring. But, (thankfully) the Supreme Court of the United States has confirmed that the inclusion of a reporting requirement in the Internal Revenue Code does not mean that it can’t be challenged.

    The issue is whether something is mainly tax legislation or whether it is mainly procedure and process legislation. The true effects of the CIC decision will take years and a large number of lower court decisions to work out whether something is primarily tax or whether it is procedure that is independent of tax. I predict this decision will have a major impact and that we will see many challenges to Treasury regulations because of it.

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