In Hancock County Land Acquisitions v US the taxpayer brought an action alleging that the IRS’s failure to refer its case to the IRS’s Independent Office of Appeals violated the Taxpayer First Act’s addition of Section 7803(e)(4) and its mandate that Appeals “shall be generally available to all taxpayers.” The Eleventh Circuit, in an unpublished opinion, held that the Anti-Injunction Act (AIA) barred the lawsuit.
read more...The facts in Hancock involve an IRS examination that eventually led to the IRS’s issuance of a Final Partnership Administrative Adjustment (FPAA) pertaining to a charitable contribution deduction of approximately $180 million for a conservation easement Hancock had donated on land it owned. IRS had asked Hancock to extend the SOL on assessment prior to issuing the FPAA. Hancock refused but then changed its mind; at that point the IRS had moved on and issued the FPAA.
Hancock filed a suit in federal court asking for injunctive relief:
(1) compelling the IRS to agree to extend the statute of limitations,
(2) compelling the IRS to provide Hancock with “independent review” of its tax case by the Appeals Office,
(3) enjoining the IRS from violating I.R.C. § 7803(e), and
(4) temporarily enjoining the IRS “from issuing an FPAA” until after providing Hancock with “an independent review of its case by the Appeals Office.”
The district court dismissed the case, finding that the suit was barred by the AIA and its close cousin, the tax exception to the Declaratory Judgment Act (DJA). I discussed some of the preliminary filings in the district court case, as well as a Tax Notes article by Kristen Parillo in More On The Implications of CIC Services last May.
Earlier this month the 11th Circuit affirmed the district court, applying CIC Services. The 11th Circuit described the Supreme Court’s holding as follows:
Three considerations led to that conclusion in CIC Services. First, the reporting rule at issue “impose[d] affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty,” second, the taxpayer was “nowhere near the cusp of tax liability” because the “reporting rule and the statutory tax penalty [were] several steps removed from each other,” and third, the requirement was enforced through criminal penalties in addition to tax penalties.
These considerations did not favor Hancock County:
First, Hancock will not be subject to any “costs separate and apart” from the tax penalty that may result from the FPAA.
Second, Hancock was on “the cusp of tax liability” when it filed its suit, because the FPAA is the statutory prerequisite to assessing a tax on Hancock, see I.R.C. § 6232(b), and Hancock concedes that “if the FPAA is allowed [to] stand, the IRS will be able to immediately assess a tax.”
Third, Hancock will suffer no criminal punishment by following the AIA’s “familiar pay-now-sue-later procedure.” [LB: in fact, Tax Court allows the pay later approach]
As the Eleventh Circuit framed the challenge, Hancock’s suit was, “[a]t its heart…a ‘dispute over taxes’”(quoting CIC Services):
Unlike in CIC Services, the “legal rule at issue” here, is a tax provision, not a reporting requirement backed up with a tax provision. Hancock’s single claim alleged that the IRS violated § 7803(e)(4) by failing to provide Hancock with administrative review of its tax case. To remedy that alleged violation, Hancock sought to compel the IRS to provide it with administrative review and, until it did, to prevent the IRS from issuing an FPAA (which the IRS had already issued). The FPAA that the IRS had issued finds that Hancock improperly claimed a $180 million deduction on its 2016 tax return, resulting in an underpayment of taxes. Because the relief Hancock’s lawsuit seeks would restrain the IRS from assessing and collecting those taxes, it is barred by the AIA.
The 11th Circuit also easily dismissed the taxpayer’s alternate argument that even if the AIA applied, the taxpayer should be entitled to benefit from the narrow Enoch v Williams Packing exception if they will “suffer irreparable injury if collection [of the tax] were effected” and show that “it is clear that under no circumstances could the [IRS] ultimately prevail.” As to the first prong, the taxpayer could seek substantive redress in Tax Court (albeit without the confidentiality that comes with a possible administrative resolution). As to the second prong, the opinion noted that it was not clear that the statute required Appeals access at the time the taxpayer sought it, noting that 7803(e)(5) provides for referral to the Appeals Office for “any taxpayer which is in receipt of a notice of deficiency” and that could also be read to mean the analogous FPAA.
Conclusion
CIC Services arose in the context of a pre-enforcement taxpayer challenge to IRS rulemaking. But many aggrieved taxpayers will attempt to get around the AIA in the context of direct IRS inquiries to the positions taken on tax returns. In administrative law parlance, these latter challenges pertain to the IRS’s adjudicatory powers.
Following on the heels of last week’s First Circuit opinion in Harper v Rettig that held that the AIA did not bar a constitutional challenge to the IRS’s use of John Doe summons, we are seeing courts struggle to apply the Supreme Court’s CIC Services opinion.
I am having a hard time squaring this case and Harper v Rettig. The same considerations the 11th Circuit discusses in Hancock County Land Acquisitions would prevent a challenge to the IRS’s John Doe summons process. 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.
On the other hand, one byproduct of Hancock is that it essentially renders meaningless the TFA mandate that taxpayers have access to Appeals, thus frustrating a fundamental taxpayer right. While it is difficult to envision a partisan Congress taking this on, perhaps it is time for Congress to take a fresh look at the AIA and the important issue of when and in what circumstances taxpayers can challenge IRS actions. A perhaps less steep hill to climb would involve Congress narrowly providing a specific exception to the AIA for supposed violations of the right to Appeals in Section 7803(e)(4). In the meantime, I suspect that we will soon have another opportunity for other circuits and perhaps the Supreme Court wrestling with the meaning of a 19th century statute that continues to present challenges.
About Leslie Book
Interesting. But, sorry, I don’t understand why they brought didn’t just bring the case to Tax Court to review the assessment?
https://www.irs.gov/irm/part8/irm_08-019-012#idm140200852543232
That would automatically have kicked the case back to Appeals and they could have presented their evidence about why the contribution deduction was legitimate.
They wanted a chance to do this without going to Tax Court; confidentiality and perhaps a sense that Appeals would approach differently without Counsel in the mix
Les, you are offering logical strategic reasons they may have had. Perhaps there are logical reasons that are not strategic reasons. Maybe just by continuing the administrative pre-litigation commotion, the hope was that the IRS would commit some footfault that they could exploit. Or maybe they were just hoping to delay the inevitable. Some taxpayers and counsel prefer delay. Of course, this is just speculation.
It is a controversial area where the law may be uncertain. Going to Appeals could be a free option for the taxpayer. Maybe the IRS commits a fatal foot-fault (unlikely). Maybe Appeals decides that this is a base better settled at a number acceptable to the taxpayer than litigated. Maybe the taxpayer just wants another bite at the apple as is its right. Maybe Appeals refuses to discuss anything, and the taxpayer gets some sympathy if a judge later sees this as the IRS’s subversion of the statutorily mandated independent review.
But step back here. It is not the responsibility of the taxpayer to justify why it sought to make use of a statutory right. In a proceeding addressing this (if there could be one), that would not even be a relevant matter for inquiry except to assess a remedy against the IRS (if there were such a thing).
I have not checked whether there was any oral argument, but if I were on the 11th Circuit (maybe this is why I am not), I might have ordered the government to produce IN PERSON all of the IRS officials in the decision chain of refusing to allow the taxpayer to go to Appeals, to provide in open court a cogent reason why. There are few things more imposing and likely to bring about corrective action than having to stand before a Circuit judge without the cloak of bureaucratic anonymity and try to explain or justify malfeasance that cannot be explained or justified.
EXACTLY!
It is time for the Supreme Court, in an appropriate case, to carve out an exception to the AIA and TIA for any situation where the government is violating a statute and has no colorable claim to the contrary. Any fair reading of these provisions and their history would justify that kind of exception.
And as far as the current test’s first prong goes, I would not dismiss confidentiality lightly. I have heard of taxpayers who have grudgingly paid assessments rather than challenge them because in order to challenge them they would have had to make publicly available details that they felt were best left as trade secrets.
Is there any conceivable judicial proceeding, either independently or in a counterclaim or defense to the assessment, where the taxpayer can recover damages against the IRS for violating the taxpayers right to go to Appeals?
Les, good offering. The Supreme Court has sometimes (some might even say often) screwed up the tax law. (Poster child for me: Frank Lyon. Now, in CIC Services, the Supreme Court has screwed up the confluence of tax law and administrative law. I just cannot imagine that the Supreme Court thought its decision was going to have the type of effect imagined in Harper v. Rettig, as well as in some other possible areas. That is why I used to say to my Tax Procedure students that tax cases are too important for the Supreme Court to decide, and I think this is particularly true when a conservative, Federalist and generally anti-IRS majority, holds the reins. I am concerned that much good vis a vis the IRS or an efficient tax system will come out of that.