D.C. Circuit Majority Opinion in Florida Bankers Not Consistent with Supreme Court’s Direct Marketing Decision (Part 1)

Frequent guest contributor Patrick J. Smith of Ivins, Phillips & Barker discusses the Florida Bankers decision that the DC Circuit handed down on Friday. The state of the law when it comes to the Anti-Injunction Act and its relationship to the IRS is far from clear, and courts seem to be taking views that are hard to reconcile. In this post, Pat, who has written more on these issues than just about anyone, provides the deep context for his dissatisfaction with the opinion. Tomorrow Pat will tell us why the Florida Bankers dissent got this one right. Les

On Friday of last week, a divided panel of the D.C. Circuit Court of Appeals issued its opinion in Florida Bankers Association v. Department of the Treasury, six months after the oral argument in the case was held. The majority held the suit was barred by the Anti-Injunction Act in the Internal Revenue Code, based on reasoning that is clearly inconsistent with the Supreme Court’s decision in Direct Marketing Association v. Brohl in March of this year. The weakness of the majority opinion in Florida Bankers, together with the strength of a dissenting opinion filed in the case, as well as the inconsistency of the majority opinion not only with the Supreme Court’s Direct Marketing decision but also with other D.C. Circuit opinions, all make the Florida Bankers case a strong candidate for en banc review. In this two-part post, I will first describe the issue in the case and provide the context for why I think the dissenting opinion is correct and the majority is wrong. Tomorrow, I will discuss in detail the dissenting opinion, and describe why I believe the dissent’s approach is consistent with the narrow reading of the Anti-Injunction Act that the Supreme Court and prior DC Circuit precedent requires.

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Florida Bankers is a challenge by two bankers associations to the validity of regulations issued by the IRS and Treasury requiring U.S. banks to report to the IRS information concerning interest earned by non-resident aliens on accounts they hold in the banks. Although this interest is not subject to income taxation in the U.S., the IRS and Treasury claim the reporting requirement is necessary in order to make it possible for the U.S. to comply with information sharing agreements it has entered into with other countries that benefit the U.S. by providing information on bank accounts held by U.S. citizens in banks in those countries.

The bankers associations argue that in issuing the regulations, the IRS and Treasury violated the Administrative Procedure Act’s arbitrary and capricious standard under 5 U.S.C. § 706(2)(A) by failing to give sufficient weight to the likelihood that some non-resident aliens would respond to the information reporting requirement by withdrawing funds from U.S. banks, not because they wish to avoid paying tax to their home countries on the interest earned on the accounts, but instead because they fear the information either will be misused by their home country governments or will not be protected by those governments against misuse by others. In the district court, the government argued that the suit was barred by the Anti-Injunction Act, section 7421(a) of the Internal Revenue Code, which provides that, with certain exceptions, such as Tax Court deficiency actions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”

The government argued that even though the information that the banks were required to report related to interest that is not subject to income taxation in the U.S., nevertheless, the Anti-Injunction Act applied to bar the suit because of the penalty that banks would be subject to if they failed to comply with the reporting requirement that is imposed by the regulations, and because this penalty is treated as a tax for purposes of the Anti-Injunction Act, under section 6671(a) and the Supreme Court’s decision in NFIB v. Sebelius. The district court held that the Anti-Injunction Act did not apply for several reasons ( Les’ January 2014 post discussing the district court opinion, with links to that decision, can be found at APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius).    First, the penalty would be imposed only if one of the banks that are members of the associations that brought the challenge violated the reporting requirement, but none of these banks has either violated the requirement or threatened to do so. The challenge is not to the penalty but rather to the reporting requirement itself. Second, the D.C. Circuit, in a 1987 decision, Foodservice and Lodging Institute, Inc. v. Regan, had held that a challenge to the validity of another information reporting requirement that did not relate directly to the assessment or collection of taxes but, that was subject to the same penalty that applied to the information reporting requirement at issue in Florida Bankers, was not barred by the Anti-Injunction Act. Finally, in Seven-Sky v. Holder, the D.C. Circuit decision addressing the same issue subsequently decided by the Supreme Court in NFIB v. Sebelius, the D.C. Circuit had noted that the Anti-Injunction Act “has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement.” 661 F.3d 1, at 9 (D.C. Cir. 2011).

However, the district court rejected the challenge on the merits. I have explained in two Tax Notes articles here and here why I believe the district court’s decision on the merits was incorrect. However, the D.C. Circuit did not reach the merits. Instead, the majority opinion, written by Judge Kavanaugh, held the suit was barred by the Anti-Injunction Act, and while the dissenting judge, Judge Henderson, disagreed with that conclusion, nevertheless, she did not express a view on the merits.

As noted earlier, the majority opinion in Florida Bankers is incorrect because it is clearly at variance with a Supreme Court decision that was issued in March of this year. Less than a month after the February oral argument in Florida Bankers, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. As I noted in a post here soon after that decision was issued and at greater length in a subsequent Tax Notes article, while the Direct Marketing decision did not deal directly with the Anti-Injunction Act, but instead with a different provision, the Tax Injunction Act, in a different title of the United States Code, a provision that imposes restrictions similar to those in the Anti-Injunction Act on the jurisdiction of federal district courts to hear cases involving taxes imposed by the states, nevertheless, the strong similarities between the two provisions, and the nature of the Court’s reasoning in the Direct Marketing decision, support the conclusion that the Court’s analysis in Direct Marketing would be equally applicable with respect to the Anti-Injunction Act.

Like the Anti-Injunction Act, the Tax Injunction Act prohibits suits that would “restrain” the “assessment” or “collection” of taxes. In Direct Marketing, the Court held that because the two provisions are so similar, and because the Tax Injunction Act was modeled on the Anti-Injunction Act, the words in the Tax Injunction Act should be given the narrow, technical meaning those words have in the Internal Revenue Code. According to the Court, in the Internal Revenue Code, the words “assessment” and “collection” refer to well defined and specific phases of the overall process of obtaining tax revenue, and information reporting is not part of either of those phases, even where the information being reported bears directly on someone’s tax liability. In addition, according to the Court, the word “restrain” does not mean that any suit that might have the effect of “inhibiting” the collection of state tax revenue is barred by the Tax Injunction Act.

As a result of the foregoing reasoning, the Colorado statute that was being challenged in Direct Marketing, which required out-of-state retailers to provide the state with information reports on their sales to residents of the state, was not sufficiently closely connected with the collection or assessment of tax for the challenge to be barred by the Anti-Injunction Act. Although the Court had ruled in two cases in 1974, Bob Jones University 416 U.S. 725 (1974). and Americans United 416 U.S. 752 (1974), that suits challenging the IRS’s revocation of the tax-exempt status of an organization was barred by the Anti-Injunction Act because of the effect that the challenge would have, if it were successful, on the deductibility by contributors to the organization of their contributions, and although those decisions have been interpreted by the Courts of Appeals to mean that the Anti-Injunction Act bars any suit that, if successful, could have any sort of negative effect on the collection of tax revenue, nevertheless, the reasoning and the conclusion in Direct Marketing are clearly inconsistent with that type of broad reading of the Anti-Injunction Act.

Another recent D.C. Circuit decision involving the application of the Anti-Injunction Act is Z Street v. Koskinen 791 F.3d 24 (D.C. Cir. 2015). In this case, in contrast to Florida Bankers, both the oral argument and much of the briefing came after the Direct Marketing decision. I discussed the opinion in this case in an op-ed at TaxProf Blog, and I discussed the oral argument in this case in my Tax Notes article that discussed the Direct Marketing decision. (Les also wrote on the Z Street DC Circuit opinion here).

This case involved a challenge by an organization that had applied to the IRS for tax-exempt status to a delay in processing the application that the organization alleged was caused by an “Israel special policy” that the IRS allegedly applies in processing tax exemption applications by organizations with an interest in Israel. Under this alleged policy, organizations with views on Israel that do not coincide with those of the administration are treated less favorably, at least in terms of the speed with which the applications are processed, than organizations whose views on Israel coincide with those of the administration.

The government filed a motion to dismiss the case in the district court on the grounds that the suit was barred by the Anti-Injunction Act. The applicability of the Anti-Injunction Act was the only issue before the D.C. Circuit. Because of the procedural posture of the case, the court was required to assume the correctness of the organization’s allegations regarding the existence of an “Israel special policy.”

At the oral argument, the panel was clearly very hostile to the position taken by the government. The panel expressed unhappiness with the fact that the government’s reply brief, which was filed after the Direct Marketing decision, had referred to that decision only in a footnote. That footnote argued that since the Direct Marketing decision had not cited the Bob Jones or Americans United decisions, the Direct Marketing decision should not be read as overruling those decisions by implication. The questions and comments by the panel at oral argument suggested that they viewed the Direct Marketing decision as being centrally relevant to the issue in Z Street.

Based on the oral argument, it was no surprise that the D.C. Circuit opinion in Z Street held the Anti-Injunction Act inapplicable to the case. However, the tone of the opinion was considerably milder than might have been expected based on the oral argument. In addition, the decision that the Anti-Injunction Act did not apply was not based on the Direct Marketing decision, but rather on the Supreme Court’s 1984 decision in South Carolina v. Regan, 465 U.S. 367 (1984) which held that the Anti-Injunction Act does not apply in cases where the party challenging IRS action has no other mechanism for bringing its challenge than a suit in district court. The D.C. Circuit panel held that the suit Z Street had brought in district court was the only way the organization could challenge the alleged IRS delay in processing the application.

While the Z Street opinion did not rely on Direct Marketing for its conclusion that the Anti-Injunction Act did not apply, nevertheless, there is important dictum in the Z Street opinion bearing on the relevance of Direct Marketing for the interpretation of the Anti-Injunction Act. In response to the government’s argument that Bob Jones and Americans United require a broad application of the Anti-Injunction Act under which the only way tax issues can ever be litigated is through tax refund suits and Tax Court proceedings specifically authorized by provisions of the Internal Revenue Code, the Z Street opinion noted that the D.C. Circuit had previously rejected this position in 2011 in its en banc opinion in Cohen v. United States 650 F.3d 717 (D.C. Cir. 2011). In that case, the en banc D.C. Circuit held that a suit challenging the validity of a procedure adopted by the IRS for refunding taxes that had been improperly collected was not barred by the Anti-Injunction Act. I discussed the Cohen decision in a Tax Notes article in 2011. In Z Street, the court noted that “[I]n Cohen we rejected this view of ‘a world in which no challenge to [the IRS’s] actions is ever outside the closed loop of its taxing authority.’”

Z Street then had the following observations on Direct Marketing:

Our rejection of the Commissioner’s broad reading of the [Anti-Injunction] Act finds support in the Supreme Court’s recent decision in Direct Marketing Association v. Brohl. There, interpreting the Anti-Injunction Act’s cousin, the Tax Injunction Act, which serves a similar function for federal court challenges to state taxes, the Court read “restrain” in that statute as having a “narrow[] meaning…captur[ing] only those orders that stop…assessment, levy and collection” rather than “merely inhibit” those activities….Brohl’s holding is significant here because the Court “assume[s] that words used in both Acts are generally used in the same way.”

Against this background, it would have been expected that Direct Marketing would play a central role in the D.C. Circuit opinion in Florida Bankers. And, in fact, Direct Marketing plays a central role in Judge Henderson’s dissenting opinion. Much of this dissenting opinion is what I would have expected to read in a unanimous opinion for the panel. Judge Henderson’s dissenting opinion is nearly twice as long as Judge Kavanaugh’s majority opinion. In tomorrow’s second part to the post, I will discuss the dissenting opinion, and how in my view the dissent’s view is correct in light of the developments I have discussed today.

DC Circuit Allows Suit Alleging IRS Discriminated Against Organizations Seeking Exemption to Proceed

Wishing our readers a belated Happy Father’s Day. Midway through drafting this, I enjoyed Father’s Day breakfast in bed from my 13-year old daughter Hannah and my three step-daughters. Hannah filled a mason jar with coupons reflecting things she would like to do this year with me or things she is looking forward to that we have already planned (e.g., Broadway play, trip to Maine to drop off at camp).

On to a tax procedure update….

Earlier this month on PT I discussed the oral argument at the DC Circuit in the Z Street v Koskinen case in a post DC Circuit Criticizes Government in Case Alleging an Israel Special Policy for Tax Exemptions. The case involves allegations that the IRS subjected an organization seeking 501(c)(3) status to special scrutiny. Z Street argued that the IRS scrutiny violated the First Amendment because IRS had an internal review policy that subjected Israel-related organizations “to more rigorous review procedures than other organizations applying for that same status.” The District Court had earlier ruled that in favor of Z Street on the government’s motion to dismiss, and the government appealed the denial.   The oral argument in May reflected the panel’s deep displeasure with the government’s attempt to use the Anti-Injunction Act to avoid (or delay more precisely) judicial review of serious allegations. After listening to the argument, I was certain that the panel would find a way to allow the case to proceed to the merits.

On Friday, the DC Circuit decided the case in favor of Z Street (opinion here).

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Our frequent guest poster Pat Smith has a succinct write up on the opinion over at Tax Prof. I offer some brief observations on the opinion.

The opinion does a nice job summarizing the main AIA cases (such as Bob Jones, Cohen and Americans United) and what they signify:

These cases, then, stand for the following basic propositions. First, outside of certain statutorily authorized actions, like those brought pursuant to section 7428, the Anti- Injunction Act bars suits to litigate an organization’s tax status (Bob Jones and “Americans United”). Second, the Act does not apply in situations where the plaintiff has no alternative means to challenge the IRS’s action (South Carolina) or where the claim has no “implication[s]” for tax assessment or collection (Cohen). Finally, in administering the tax code, the IRS may not discriminate on the basis of viewpoint (Regan).

Some had thought that the DC Circuit in Z Street would decide the case in favor of Z Street on the basis of the suit not having an impact on assessment or collection, especially in light of recent cases which have suggested a narrow reading of those terms (like Cohen and Direct Marketing). Pat Smith’s post on Procedurally Taxing and his recent Tax Notes article discuss the recent cases and in particular the likely impact Direct Marketing will have on AIA cases.

In his Tax Prof Op-Ed, Pat offers an observation that the Florida Bankers challenge to expanded information reporting regs (which I have discussed previously here) may give the DC Circuit an occasion to discuss where to draw lines around what is an impermissible connection to assessment or collection.

On the issue as to when a suit is impermissibly connected to assessment or collection, I point readers to the main language in the Z Street case where the panel decided that the case was not controlled by Cohen, but rather fit within the “no other remedy” South Carolina exception:

Recall that Cohen requires that we examine Z Street’s complaint to determine, among other things, “any implication the remedy [it seeks] may have on assessment and collection.” In Cohen, the remedy sought could have no possible “implication” for assessment and collection because the IRS had already assessed and collected the tax—it was in the Treasury.By contrast, Z Street’s suit arguably could have “implication[s]” for assessment and collection. If, for example, Z Street prevails in this case and obtains a tax exemption earlier than it otherwise would have, contributions to it will be tax deductible earlier, thus reducing the overall assessment and collection of taxes. In the end, however, we have no need to decide whether such an implication is sufficient to trigger the Anti-Injunction Act. As the Court explained in South Carolina, the Act does not apply at all where the plaintiff has no other remedy for its alleged injury—precisely the situation in which Z Street finds itself. (emphasis added; citations omitted).

To illustrate its point that Section 7428 was inadequate, the panel continued:

Consider section 7428. According to the Commissioner, if Z Street had just waited an additional 32 days it could have filed suit under this provision and obtained an “adequate remedy.” Appellant’s Br. 48. But as the Commissioner concedes, section 7428 authorizes a court to issue only “a declaration with respect to [an organization’s] qualification” for a section 501(c)(3) exemption, 26 U.S.C. § 7428, and Z Street is not seeking to establish its eligibility for a tax exemption, supra at 10. Instead, it seeks an order prohibiting the IRS from delaying consideration of Z Street’s section 501(c)(3) application because of the organization’s views on Israel. The “only thing we’re suing about,” Z Street’s counsel told us at oral argument, “is delay.” Oral Arg. Rec. 51:14–38; see also id. at 41:57–42:57 (statement of Z Street’s counsel agreeing that all Z Street seeks is an order barring application of the “Israel Special Policy” insofar as it causes delay). In other words, although section 7428 provides a remedy, that remedy cannot address Z Street’s alleged injury.

Parting Thoughts

Just this past Thursday I submitted a revised Chapter 1 of Saltzman and Book IRS Practice & Procedure, which includes an expanded discussion of the AIA (and APA). What was current as of Thursday became in need of a refresh on Friday (Thomson Reuters: hold the presses). Such is the state of law under the AIA. Stay tuned as the DC Circuit in Florida Bankers will likely have more to say on the topic, and in particular when implications on assessment or collection are sufficient to trigger AIA preclusion.

The Implications of the Supreme Court’s Direct Marketing Decision for the Interpretation of the Tax Exception in the Federal Tort Claims Act

Today’s  guest post is from Patrick J. Smith of Ivins, Phillips & Barker. Pat builds on his earlier posts in PT and his other articles discussing the courts’ evolving approach to the Anti-Injunction Act. Here, Pat explores the developments’ possible implications to the tax exception in the Federal Tort Claims Act. Les

In a post here in March, I discussed the implications of the Supreme Court’s Direct Marketing decision for the interpretation of the Anti-Injunction Act. Although Direct Marketing dealt with the Tax Injunction Act rather than the Anti-Injunction Act, nevertheless, because of the strong similarities between the two provisions and the fact that the Court’s reasoning in Direct Marketing was based almost entirely on these similarities and on giving the terms “assessment” and “collection,” which appear in both provisions, the narrow technical meaning these terms have in the Internal Revenue Code, I argued that the narrow reading the Court gave to the Tax Injunction Act in Direct Marketing should mean that a similarly narrow reading will now be given to the Anti-Injunction Act, rather than the very broad reading this provision has been given since two 1974 Supreme Court decisions, Bob Jones University and “Americans United.” Recently I published an article in Tax Notes elaborating on that argument. On Friday of last week, Les had a post here about the recent D.C. Circuit oral argument in Z Street, Inc., where the application of the Anti-Injunction Act is the main issue, and during which the judges on the panel made clear that they believed that the Direct Marketing decision was centrally relevant to the resolution of that issue.

Earlier last week, in Snyder & Associates v US a district court in California issued an opinion in a case involving the “tax exception” to the Federal Tort Claims Act “FTCA.” This tax exception provides that the provisions of the FTCA do not apply to “[a]ny claim arising in respect of the assessment or collection of any tax.”

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The district court decision is in a suit brought under the FTCA by Snyder & Associates Acquisitions LLC (“Snyder”), a financial lender that provides refund anticipation loans (“RALs”) to taxpayers, whereby Snyder lends money to taxpayers based on their expectation of receiving tax refunds. Snyder obtains prospective borrowers through referrals from tax return preparers.

Snyder determined that one of the referrals was using a fraudulent identity and issued stop payment orders on all the loan checks issued to customers referred by the same tax return preparer. When Snyder contacted that tax return preparer, she told Snyder that she was working with the IRS in an undercover sting operation to identify instances of fraudulent tax returns. The IRS agent with whom she was working asked Snyder to cancel the stop payment orders in order to assist the investigation and assured Snyder that it would not suffer any losses as a result of their cooperation with the investigation. However, the IRS did not make good on the $2.6 million in losses Snyder claimed to have suffered as a result of its cooperation with the investigation.

The district court agreed with the government that Snyder’s FTCA suit was barred by the tax exception to the FTCA (See Ama Sarfo, IRS Cooperator Left To Eat $2.6 Cost In Fraud Investigation, Law360, June 3, 2015). The district court agreed with the government that the interpretation of the tax exception was governed by cases such as Capozzoli v. Tracey 663 F.2d 654, 658 (5th Cir. 1981), which have held that the tax exception is applied broadly to “encompass any activities of an IRS agent even remotely related to his or her official duties.”

However, the connection to Direct Marketing is that cases such as Capozzoli v. Tracey clearly rely on the interpretation given to the Anti-Injunction Act by Bob Jones University as the basis for their interpretation of the tax exception to the FTCA:

The language of 28 U.S.C. § 2680(c) is identical to that of another U.S.Code provision, 26 U.S.C. § 7421(a), which prohibits any “suit for the purpose of restraining the assessment or collection of any tax” (emphasis added). In construing Section 7421(a), the Supreme Court in Bob Jones University v. Simon, 416 U.S. 740 (1974) interpreted the phrase “assessment and collection of taxes” broadly to preclude judicial interference with any phase of IRS activities. We believe that both 26 U.S.C. § 7421(a) and 28 U.S.C. § 2680(c) reflect the government’s strong interest in protecting the administration of its tax system from the burden of constant litigation. This interest would be completely frustrated if we were to read Section 2680(c) as providing an immunity for only certain narrowly defined activities of the IRS.

Capozzoli v. Tracey 663 F.2d 654, 657 (5th Cir. 1981).

If, as I believe, the Direct Marketing decision means that the Anti-Injunction Act will no longer be given the broad reading suggested by Bob Jones University, the same conclusion holds for the tax exception to the FTCA. Under the narrow interpretation of the tax exception to the FTCA that Direct Marketing would suggest, it seems very clear that the facts in the Snyder case would not come within the tax exception, since fraudulent tax returns do not involve the “assessment” or “collection” of any actual tax. However, neither the government nor the plaintiff in Snyder cited Direct Marketing in their briefs in the district court, and the district court opinion likewise did not cite Direct Marketing.

It is notable, however, that the plaintiffs’ brief did include a reference to the Wall Street Journal article reporting on the D.C. Circuit oral argument in the Z Street case, and their brief in fact included a copy of that article as an appendix. It is unfortunate that the plaintiffs apparently did not understand the full implications for their case of what was being discussed in that oral argument.

DC Circuit Criticizes Government in Case Alleging an Israel Special Policy for Tax Exemptions

On my list of tax procedure things to do was to listen to last month’s oral argument in the DC Circuit Court of Appeals case of Z Street v Koskinen. Longtime readers of the blog with a good memory may recall Stephen discussing the case last year in a Sum Op. The case involves the government’s appeal of a district court decision involving allegations that the IRS subjected an organization seeking 501(c)(3) status to special scrutiny. In particular, Z Street argued that the IRS scrutiny violated the First Amendment because IRS had an internal review policy that subjected Israel-related organizations “to more rigorous review procedures than other organizations applying for that same status.” According to the complaint, an IRS agent told Z Street counsel that organizations whose policies differed from the Obama administration on Israel were “being sent to a special unit in the D.C. office to determine whether the organization’s activities contradict the Administration’s public policies.”

Viewpoint discrimination like that alleged raises serious constitutional issues. DOJ argued below that the court should not hear the case because the Anti-Injunction Act denied the district court jurisdiction to hear the case. Organizations with a beef about the exemption process, according to the government, should make their arguments in refund or deficiency cases, or in cases authorized under Section 7428 allowing for declaratory judgments relating to an organization’s qualifications for tax exempt status.

The District Court denied the government’s motion to dismiss; the government appealed. The case revolves around the reach of the Anti-Injunction Act, which holds that “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.”

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In Z Street the government essentially argued that the lawsuit related to the assessment or collection of tax, thus squarely precluded by the AIA. Taking a broad view of the AIA, the government suggested both below and in last month’s argument that lawsuits that may have an impact on assessment or collection should be barred, especially if the suit arises prior to the time that there has been an assessment. The district court rejected that approach in a well-reasoned opinion, emphasizing that Z Street was not seeking a determination on its tax-exempt status, but was seeking relief from allegedly constitutionally infirm practices:

In other words, Z Street’s ultimate tax liability will be a function of whether it qualifies for tax-favored treatment under the criteria laid out in Section 501(c)(3), not whether it prevails in this lawsuit, and the IRS’s analysis of its qualifications will be based on Z Street’s activities as an organization. The only matter at issue in the instant lawsuit is whether, in addition to evaluating Z Street’s activities as it would any other organization’s, the IRS may constitutionally apply a more stringent standard of review that is allegedly reserved for organizations whose activities relate to the promotion of Israel.

What about the government’s chances on appeal? Using the AIA as a bar to review of allegedly constitutionally suspect practices did not sit well with the panel last month. The Wall Street Journal hit the nail on the head in its brief write up of the Z Street oral argument where it noted how Judge Sentelle criticized the government for essentially mischaracterizing the relief Z Street sought:

They are not in court seeking to restrain the assessment or collection of a tax, they are in court seeking a constitutionally fair process.

The argument itself is at some levels entertaining for the reason that the judges each come up with differing ways of expressing their incredulity and displeasure with the government’s position in the case. Most of the criticism centered around that Z Street was not seeking a remedy that went to its tax status but instead looked to expose and prohibit conduct that if true undoubtedly raised serious issues. If the case did not involve such serious allegations I might have found the argument, and the government attorney’s on the ropes responses, more entertaining. Yet the charges are serious, and allegations of that sort of agency and executive branch misconduct go to the very heart of the tax system’s integrity. Allowing the case to proceed gives the taxpayer the right to get to the merits. When the allegations are as serious as this I would have thought that the government would not hide behind a weak AIA argument.

As a technical matter, in the last few years have been a few cases where courts have rejected the government’s argument for an expansive read of the AIA, including the DC Circuit’s en banc opinion in Cohen and the Supreme Court last month in Direct Marketing, an analogous case under the Tax Injunction Act (I might add that the DOJ lawyer was admonished during the oral argument for the government’s only citing to Direct Marketing in a footnote in its reply brief). For readers wanting more on the technical AIA issues, I recommend the district court Z Street opinion itself and the excellent guest post by Patrick Smith on the Direct Marketing case. The trend in these cases is for a more restrained reading of the reach of the AIA, and while one can make a straight-faced argument that most every suit involving the IRS connects in some way to assessment or collection, some cases (like Z Street) are too attenuated from tax assessment or collection to warrant a dismissal.

One reason (among many) for IRS’s unpopularity is that for many years a significant amount of its actions escaped judicial review. As IRS has increased responsibility beyond its paramount mission of collecting revenues, the historical reasons for the discretion IRS has exercised have lessened. Yet there are still strong reasons to be wary of an unfettered right to review of all of the agency’s decisions. IRS has long been able to use the broad reach of the Anti-Injunction Act and Declaratory Judgment Act to avoid having many of it its actions brought before a court in the absence of a specific statutory right to such review. Nonetheless, in cases such as Z Street I find it hard to square my support of some exceptional agency protections. While it is sometimes hard to gauge a court’s likely decision on the oral argument alone I would be shocked if the DC Circuit does not find in favor of Z Street on the issue of whether the suit should proceed to the merits. Stay tuned for more cracks in the government’s AIA defense, and in years to come a renewed judicial focus on where the courts will draw the line on suits challenging IRS actions.

 

 

 

 

Supreme Court’s Direct Marketing Case May Have Great Significance in Anti-Injunction Act Cases

We welcome back today as guest poster Patrick Smith of Ivins, Phillips & Barker. Pat discusses this week’s Supreme Court Direct Marketing Association case, which will likely influence how courts will interpret the reach of the Anti-Injunction Act.

On Tuesday of this week, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. This decision related to a suit that had been brought in U.S. district court to enjoin notice and reporting requirements that had been imposed by the state of Colorado on out-of-state internet retailers relating to sales to Colorado residents. The purpose of these requirements was to assist the state in collection of use tax on these sales.

The issue in the case was whether the district court was barred from hearing the suit by the Tax Injunction Act (TIA), which requires that certain suits relating to state taxes must be pursued in state courts rather than federal courts. The opinion held that the U.S. district court was not barred from hearing the case by the TIA.

While the decision obviously has considerable significance in its direct application, it may have equally great if not greater significance in its implications for the interpretation of the Anti-Injunction Act (AIA), section 7421(a) of the Internal Revenue Code, which imposes limitations on the types of suits relating to federal taxes that may be maintained in U.S. district courts that are quite similar to the limitations imposed by the TIA on suits relating to state taxes. The implications of the decision for the AIA are that as a result of this decision, the AIA may now be interpreted more narrowly than it has been since two significant Supreme Court decisions in 1974, Bob Jones University and Americans United.” These decisions held that a suit to enjoin revocation by the IRS of the tax-exempt status of the organization bringing the suit was barred by the AIA because of the effect the suit would have on tax revenues through the effect the suit would have on the ability of persons making contributions to the organization to claim tax deductions for the contributions.

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The Direct Marketing Case Takes a Different View than Prior Supreme Court Cases

These two decisions could be read as standing for the proposition that any suit that could, if successful, have an adverse impact on the collection of federal tax revenue is barred from being heard in district court by the AIA except through the mechanism of a tax refund suit. The Direct Marketing decision clearly rejected such a broad reading of the TIA, and this rejection should be equally applicable for the AIA.

The texts of the two provisions are very similar. The TIA provides in relevant part that “[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” The AIA provides in relevant part that, with a number of listed exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.

The Court relied on the similarities between the AIA and the TIA in its interpretation of the TIA. In addition, the Court also relied on the historical relationship between the two provisions, noting that the AIA, which was enacted originally in 1867, was the model for the TIA, which was enacted in 1937.

The Court focused on the close relationship between the TIA and the Anti-Injunction Act to give a narrow, technical reading to the terms “assessment,” “collection,” and “restrain,” all of which appear in both the TIA and the Anti-Injunction Act. The Court relied on the fact that in the Internal Revenue Code, where the AIA is located, the terms “assessment” “levy” and “collection” have very narrow and precise technical meanings that “do not include informational notices or private reports of information relevant to tax liability.” While the TIA includes the term “levy” and the AIA does not, that should not result in any significant difference in interpretation for the terms that appear in both provisions.

As the Court noted,

the Federal Tax Code has long treated information gathering as a phase of tax administration procedure that occurs before assessment, levy, or collection. ‘Assessment’…refers to the official recording of a taxpayer’s liability, which occurs after information relevant to the calculation of that liability is reported to the taxing authority. Finally, ‘collection’ is the act of obtaining payment of taxes due. ‘[C]ollection’ is a separate step in the taxation process from assessment and the reporting on which assessment is based.

Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes….The TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.

The Tenth Circuit had relied on giving the term “restrain,” which appears in both the TIA and AIA, a broad meaning, basically, the sort of meaning that Bob Jones and “Americans United” might be read as giving to the AIA, namely, that “restrain” means any action that would have an adverse effect on the collection of tax revenue. The Court in Direct Marketing very clearly rejected that interpretation, in reasoning that is equally applicable to the AIA:

[A]s used in the TIA, “restrain” acts on a carefully selected list of technical terms—“assessment, levy, collection”—not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.”

Applying the correct definition, a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.

The fact that the Court in Direct Marketing interpreted terms in the TIA that appear in both the TIA and the AIA by reference to the precise meaning those terms have in the Internal Revenue Code should mean that in the context of the AIA, these precise meanings are if anything even more controlling. Thus, based on Direct Marketing, it seems very clear that the broad reading of the AIA that might be taken from Bob Jones and Americans United cannot be correct.

Impact on Other Cases: The Florida Bankers Case

Thus, for example, the Direct Marketing decision should be very relevant for the AIA issue in the Florida Bankers Association case, which is currently pending in the D.C. Circuit [Editor’s Note: for Les’ take last year in PT on the district court Florida Bankers case see APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius; for Pat’s prior articles in Tax Notes on Florida Bankers see here and here.]. This case involves a challenge to regulations requiring banks to report to the IRS information relating to interest earned on accounts held by non-resident aliens, even though such persons are not subject to U.S. tax on that interest. At oral argument on February 13 of this year, one of the judges on the panel, Judge Kavanaugh, the author of the D.C. Circuit opinion in Loving, focused his questioning on the possible applicability of the AIA to bar this challenge. Direct Marketing should provide strong support for the conclusion that the AIA does not apply in that case.

However, one very significant respect in which the TIA and the AIA are not similar is in the way they phrase their limitations. The TIA phrases its limitation in terms of the power of the district court to act but the AIA does not. In a recent post in this blog, Carl Smith discussed a recent Tax Court decision that represented the first time the Tax Court has acknowledged the line of Supreme Court cases in recent years that have made it clear that the courts must be more precise and analytical in their determination as to when statutory limitations on the ability to maintain an action in court are “jurisdictional” and when they are not than had been the case before this line of Supreme Court authority.

Justice Clarence Thomas, in his opinion for the Court in Direct Marketing, repeatedly referred to the TIA as jurisdictional. For more on this point see Arkansas v. Arkansas Farm Credit Services. This classification mattered in this case because the state of Colorado had not raised the TIA as an issue in the district court and in fact had affirmatively stated that the TIA did not apply. If the TIA were not jurisdictional, this would mean the TIA was waived. However, jurisdictional limitations can be raised at any stage of litigation.

I have argued previously that the AIA is not jurisdictional, based in part on the difference in the way the limitations in the two provisions are phrased. However, this issue remains to be definitively resolved by the courts.