Harper v Rettig Update: Government Petitions For Rehearing

This past August I discussed the government’s loss in Harper v Rettig. In Harper, the taxpayer sought a court order directing the IRS to expunge financial information allegedly obtained through  a John Doe summons. In reversing the district court, the First Circuit held that the Anti-Injunction Act was not a jurisdictional bar to a taxpayer’s suit challenging the summons.

Last week the government filed a petition for a panel rehearing. The government claims that even absent the AIA, the Administrative Procedure Act would not waive the government’s sovereign immunity. This led the government to request that the panel modify its remand order to direct the district court to consider an alternate ground for dismissal.

In its petition the government stated that it is “highly questionable whether the APA provides a basis for exercising jurisdiction in this case, and it is unclear from this Court’s opinion whether this Court definitively held that the APA provides jurisdiction. Moreover, this Court has previously held, in a case involving different facts, that the APA did not provide a basis for challenging an IRS summons.”

The issue turns on the relationship between the APA and Section 7609, the provision that opens the door to third party and taxpayer challenges to the IRS’s vast summons power.

APA Section 702 waives sovereign immunity for suits seeking nonmonetary relief and alleging wrongdoing by a federal agency. In its opinion, after concluding that the AIA did not bar the suit, the First Circuit stated that the taxpayer’s suit “appears to fit comfortably within the plain language of th[e] waiver” in Section 702.” 

Section 702 of the APA, however, also disclaims any “authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.” To similar effect is 701(a)(1), which state that provisions of APA do not apply where “statutes preclude judicial review”.  In its petition the government argues that Section 7609 is the exclusive means to challenge the government’s summons power, and that Congress protects third parties through the JDS ex parte approval process:

In Section 7609, Congress carefully delineated the limits of the waiver of sovereign immunity for challenging third-party summonses and chose not to provide persons (like taxpayer) who are not named in a summons with a procedure for challenging the summons. Instead, Congress chose to entrust the district courts with protecting the interests of third parties, such as taxpayer, whose information may be covered by a John Doe summons, by requiring that the ex parte procedures in § 7609(f) be satisfied before the summons may issue. I.R.C. § 7609(h). 

In discussing the issue, the government points to prior case law where the circuit has held that 7609 is the exclusive means for challenging a summons and that the APA did not provide jurisdiction for a challenge that was beyond the 7609 time limits.

In its petition, the government requests that permission to brief the panel so that it may wish to expand its remand order and asks that the lower court consider whether the intersection of 7609 and the APA is alternative grounds for dismissal for lack of subject-matter jurisdiction.

I suspect that the government’s failure to raise this issue previously relates to its pre and maybe even post CIC Services confidence that the AIA would independently bar a challenge to a summons. The petition is a reminder that even with the AIA not as formidable as it once was, it may not be easy to get into court to challenge what looks like an increasingly robust government use of its John Doe summons powers.

We will keep an eye on how this plays out.

Anti-Injunction Act Does Not Bar Defendant Taxpayer’s Motion to Prevent Government From Using Discovery Admissions In Later IRS Proceedings

For a simply worded statute, the Anti-Injunction Act has generated considerable litigation. The statute, codified at IRC 7421, 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[.]”

Lots of recent cases have focused on the meaning of assessment or collection for these purposes. Despite the Supreme Court’s CIC Services opinion, we are starting to see some courts seemingly moving in inconsistent directions. For more, see my recent post 11th Circuit Affirms That Anti-Injunction Act Prevents Taxpayer Seeking Access to Appeals and 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.

This takes us to today’s post and the recent 11th Circuit opinion in US v Meyer. Meyer involves a different issue, namely whether the AIA “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.”

In reversing the district court and finding that the AIA did not apply, the opinion concludes that “moving for a protective order in an action filed by the government does not amount to maintenance of a “suit”.

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The facts somewhat simplified involved a 2018 suit that the government had brought to enjoin Meyer from operating a business that purported to peddle a tax evasion scheme premised on phony charitable deductions. In that earlier suit the government sought over 1,500 requests for admission under Federal Rule of Civil Procedure 36. Meyer, with counsel, answered the admission requests.

By 2019 Meyer and the government settled the case, resulting in Meyer agreeing to no longer represent others before the IRS; prepare federal tax returns for others; or furnish tax advice regarding charitable contributions.

A little over a year after the settlement, the IRS informed Meyer that he owed millions in dollars in penalties in connection with his promotion of an abusive tax shelter. As part of the explanation, the government relied on the admissions Meyer agreed to in the earlier case, and for good measure attached the admissions as an exhibit.

Federal Rule Civil Procedure 36(b) states that “[a]n admission . . . is not an admission for any other purpose and cannot be used against the party in any other proceeding.” Meyer responded to the IRS notice, and objected to the IRS use of the admissions on the grounds that it was inconsistent with Rule 36(b).

The IRS disagreed, stating that the Rules of Civil Procedure do not apply to its administrative determinations.

After some more back and forth with the IRS, in the fall of 2020 Meyer filed a motion in the now closed injunction case that the government had brought two years earlier. That motion sought a protective order prohibiting the government from using his Rule 36 admissions “as the factual basis for penalties in a separate IRS penalty examination.”

At district court, the government argued that the government had not waived sovereign immunity and the AIA barred the suit. The district court agreed with the government.

The Eleventh Circuit disagreed, noting that the statute did not define the term suit and looking to its dictionary definition and ordinary usage, which generally involved “[a]n action or process in a court for the recovery of a right or claim.” 

Contrary to the government’s assertion, a “motion” has long been understood as distinct from a suit.  See, e.g., Alexander M. Burrill’s Law Dictionary and Glossary 730 (1867) (defining “motion” as “an application made to the judge or judges of a court . . . for the purpose of obtaining a rule or order directing some act to be done in favor of the applicant”); Black’s Law Dictionary 1164 (6th ed. 1951) (defining “motion” as “[a]n application for a rule or order made . . . to a court or judge”).  A party may make a motion within a suit, but a motion generally does not constitute a suit unto itself.  See II Bouvier Law Dictionary Desk Ed. 1786 (2012) (“A motion is presented to a court in a pending action by one party, the movant, who moves some matter for consideration[.]”) (emphasis added); The American Heritage Dictionary of the English Langauge 1147 (4th ed. 2009) (defining a “motion” as “[a]n application made to a court for an order or ruling”).

Given that the motion that Meyer sought sprung from the government’s assertion of a claim, the Eleventh Circuit held that the AIA did not bar the taxpayer from seeking a protective order from the court that had proper jurisdiction over that suit:

Based on these uniform sources, a “suit” is a judicial proceeding or action initiated for the purpose of enforcing a right or ensuring compliance with the law.  That is how the term was understood when the Anti-Injunction Act first became law and how it is understood today.  The government, and not Mr. Meyer, is the only party that filed a “suit” here—i.e., the 2018 tax case—and that action was not “for the purpose of restraining the assessment or collection of a tax.” (emphasis added)

In finding for the taxpayer, the court leaned on a few related cases that approached the issue similarly. One case was United States v. Mellon Bank, N.A., 521 F.2d 708 (3d Cir. 1975). In Mellon Bank, the government brought an action against a bank, seeking to access a taxpayer’s safe deposit box. The taxpayer intervened, and the district court held that the AIA barred the intervention. In reversing, the Third Circuit emphasized that the taxpayer “did not sue to enjoin the assessment or collection of any tax.  In fact[,] he filed no suit at all.” 

Distinguishing Dema

The opinion also took pains to distinguish the Seventh Circuit’s holding in United States v. Dema, 544 F.2d 1373 (7th Cir. 1976). That case involved the US bringing an action to enforce a summons for a taxpayer’s business and personal records, and the taxpayer seeking to quash the summonses. The district court ordered production of the business records but quashed the request for personal records.

The IRS immediately issued a notice of deficiency to the taxpayer with respect to the taxpayer’s individual tax liability. The taxpayer went back to the district court, “asking the district court to issue an order to show cause why the IRS agent working on the case should not be held in contempt of court for violating the previous order quashing the summons as to personal records, and for an order directing withdrawal of the notice of deficiency.”

The government argued that the AIA prevented the district court from entertaining the motion, and the district court disagreed, relying in large part on the rationale that underlies the Mellon Bank decision.

On appeal the Seventh Circuit reversed, though acknowledged that the government had in fact brought the original action to enforce the summons:

Although we concede, as we must, that appellee did not initiate proceedings against appellant in an attempt to enjoin the assessment or collection of taxes, it must be admitted that for all practical purposes appellee sought the identical result when he filed his motion for an order directing withdrawal of the notice of deficiency.  The net result of appellee’s motion, and the obvious intent thereof, was to restrain the IRS from pursuing any activities relating to the assessment and collection of taxes.  Accordingly, it could reasonably be argued that appellee herein instituted his own sub-action against appellant for injunctive relief, the potential result of which was in contravention of the spirit and purpose of § 7421(a)

In Meyer, the government urged the Eleventh Circuit rely on the Seventh Circuit’s approach in Dema and find that the AIA should prevent the district court from entertaining the motion. In noting that the term suit in the AIA was not a peripheral term in the statute, the court felt compelled to follow the Supreme Court’s admonition that “each word in a statute” should “carr[y] meaning,”

Moreover,  the court declined to avoid the meaning of the term suit even if the government position was consistent with the AIA’s broad purpose, again citing Supreme Court precedent that looking to purpose should not defeat plain meaning. Continuing its focus on the statute’s text, the opinion also noted that the AIA could have expressly barred any “motion, defense, intervention, or other legal maneuver.” As it did not, and only barred suits, the court, again looking to Supreme Court precedent on statutory interpretation, stated when “the terms of a statute [are] unambiguous, judicial inquiry is complete except in ‘rare and exceptional circumstances.’”

As a final point, the opinion noted that even if it were to apply a test that deviated from the text and looked to the spirit and purpose of the AIA, it still would find that the suit was not barred, with Dema’s motion much closer to the assessment and collection process that the AIA seeks to insulate:

The taxpayer in Dema did not request, as Mr. Meyer does, an order enforcing the limitations of the discovery rules on material obtained in an action filed by the government.  Instead, he sought an order directing the IRS, among other things, to withdraw a notice of deficiency—the IRS’ determination of the taxes he owed.   The order at issue in Dema, moreover, prohibited the IRS from subpoenaing any documents from the taxpayer.  This essentially constituted a total restraint on the IRS’ ability to assess penalties against him.  That is not the case here.  Mr. Meyer’s motion seeks only to enforce his understanding of the rules of discovery, not to restrain the IRS from using other mechanisms to investigate and assess tax penalties against him.  

Conclusion

Hats off to the taxpayer’s counsel for a clever way to get a possible judicial consideration on whether the IRS is entitled to use the earlier admissions in a subsequent administrative proceeding. The government has not conceded on whether the district court has jurisdiction to reopen the closed case to consider issuing a protective order. The appellate court declined to consider that issue, and it is one that the district court will likely take up on remand. If it gets over that hurdle, perhaps we will see an opinion discussing the relationship between Federal Rule Civil Procedure 36(b) and the IRS’s administrative actions.

Note that readers interested in the issue should also check out Jack Townsend’s recent blog post on the case. Jack’s blog is always worth a read.

Courtney v US Illustrates Limits of Taxpayer Challenges to Allegedly Improper IRS Collection

The recent unpublished Fifth Circuit opinion in Courtney v US nicely illustrates the challenges that taxpayers face when they allege that the IRS has taken improperly used its administrative collection powers.

Courtney pled guilty to income tax evasion from over a million dollars of improper employer reimbursements for personal expenses that he disguised to look like service payments to a company that he controlled.  After a district court restitution order, a 2012 notice of deficiency, and an assessment, the IRS began to try to collect on the unpaid taxes.

Those efforts included a levy on Courtney’s personal individual retirement account, a notice of a federal tax lien, an attempt to seize assets from an irrevocable trust which benefits his wife and children, and levies against two limited liability companies affiliated with Courtney.

In the fall of 2021, Courtney sued the IRS, seeking damages under Section 7433 for allegedly improper collection and an injunction barring further collection actions against him, the limited liability companies and the irrevocable trust.

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The district court tossed the suit for two main reasons. First, Courtney had failed to exhaust his administrative remedies before seeking damages under Section 7433. Second, it held that the Anti Injunction Act barred his demand that the IRS cease collection.  In affirming the district court, the Fifth Circuit expanded on why Courtney could not use the courts at this stage to examine the IRS’s conduct.

Section 7433 requires that taxpayers file a claim with the IRS before going to court. In responding to the government’s argument that he neglected to meet that requirement, Courtney argued that bringing an administrative claim would be futile. Some cases have held that futility can lead a court to overlook the statutory requirement to file a clam with the IRS before going to court.

In rejecting that argument, the Fifth Circuit noted that the futility doctrine is extremely narrow. Even assuming that the “IRS has been unresponsive, difficult to work with, and disingenuous of previous arrangements agreed upon by the parties” it was insufficient. Futility requires  a court to conclude that the filing of a claim would be a useless formality, and Courtney did not meet that standard.

As to the Anti-Injunction Act preventing his demand that the IRS cease collection, Courtney argued that his claims fit under the Enochs v. Williams Packing exception “which applies only if “(1) it is clear that under no circumstances could the Government ultimately prevail…[and] (2) equity jurisdiction otherwise exists.”

Both prongs are difficult to meet; the first requiring a court to prove with certainty that the plaintiff would prevail on the merits and the second requiring a showing of irreparable harm.

The Fifth Circuit declined to find that the Enochs v. Williams Packing exception applied, concluding that it was not a certainty that it would decide on the merits that the government’s collection efforts were improper. Courtney claimed that the government failed to refute his allegations that the levies against the trust and LLCs were improper. In rejecting Courtney’s claim, the court noted that while the government must prove some factual connection between the LLCs, the trust and Courtney, the taxpayer bears the ultimate burden of persuasion. Here, the government had done enough to link Courtney with the entities and Courtney himself had possession of facts necessary for a court to determine whether any collection efforts were lawful.

If Courtney had plausibly alleged that the government had obstructed his ability to prove that the government’s collection actions were improper, perhaps the court would have addressed prong two of the Enochs v. Williams Packing test.  That prong is not easily satisfied anyway, with courts often reflexively stating that refund procedures are adequate, regardless of the taxpayer’s ability to pay.

Given Courtney’s long history with the IRS, it was unsurprising that he went to court. As the opinion reflects, outside CDP, it is not easy to get a court to consider the IRS’s collection, and taxpayers must follow the preliminary path of bringing allegations of improper conduct to the agency itself.

11th Circuit Affirms That Anti-Injunction Act Prevents Taxpayer Seeking Access to Appeals

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.

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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.

 

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

In a major decision that considers the implications of last year’s CIC Services opinion the First Circuit in Harper v Rettig has held that the Anti-Injunction Act (AIA)  does not bar a constitutional challenge to IRS’s use of its John Doe Summons authority that allowed it to obtain information about a taxpayer’s virtual currency transactions.

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IRS has been actively using its John Doe summons powers to get taxpayer information from virtual currency exchanges. One of those cases involved a summons on Coinbase as part of an investigation into the reporting gap between the number of virtual currency users Coinbase claimed to have and the number of U.S. bitcoin users reporting gains or losses to the IRS during 2013 through 2015.

After Coinbase refused to comply, the government moved to enforce the summons. Following a skirmish about the scope of that summons, and a district court’s decision to allow a third party to intervene under Federal Rule of Civil Procedure 24, the court issued an order enforcing the summons. I discussed some of the procedural skirmishes a few years back in A PT Anniversary and Court Finds IRS Summons on Coinbase Suggests an Abuse of Process.

Fast forward a few years. IRS has been using the information it received to contact taxpayers it believes have failed to properly report their income from the virtual currency transactions.  One of those taxpayers was James Harper. IRS sent Harper a letter that informed him of the requirements for reporting virtual currency transactions. It helpfully told him if he believed he had not accurately reported such transactions, he should file amended or delinquent returns. The letter also warned that if he had not “accurately report[ed his] virtual currency transactions,” then he “may be subject to future civil and criminal enforcement activity.”

Shortly after receiving the letter Harper filed suit in a federal district court in New Hampshire. One aspect of the suit involved a request for injunctive and declaratory relief, alleging that the IRS unlawfully obtained his financial information from virtual currency exchanges in violation of the Fourth and Fifth Amendments.

The District Court held that the AIA deprived the court of subject matter jurisdiction over the taxpayer’s claims for injunctive and declaratory relief. 

Harper appealed and claimed that the AIA did not bar his suit because his suit pertained to the information gathering function of IRS activity, rather than the assessment or collection process.

The government and district court distinguished CIC Services, noting that in that case the plaintiff sought to avoid the economic burdens of providing information about other taxpayers to the IRS and challenged its legal obligation to do so. According the government, and unlike in CIC Services, Harper “simply does not want the IRS to possess information bearing on his tax liability.”

Back when the Supreme Court issued its opinion in CIC Services PT had many posts that discussed the uncertain boundaries of that opinion, and whether courts may apply it more broadly than the circumstances of that challenge. See for example Bryan Camp in Supreme Court Reverses the Sixth Circuit in CIC Services – Viewpoint and my post Further Initial Thoughts on CIC Services.

In a relatively brief opinion, the First Circuit reversed, finding that CIC Services and the earlier Direct Marketing opinion opened the door to Mr. Harper’s challenge because the summons authority and IRS activities to enforce the summons “clearly fall with in the category of information gathering, which the Supreme Court has distinguished from acts of assessment and collection.” As such, the court held that Harper’s suit “challenges the IRS’s information-gathering authority and the Anti-Injunction Act limits our jurisdiction only in suits involving assessment and collection.”

The government sought to distinguish CIC Services and argued that the purpose of Harper’s suit was to restrain IRS assessment and collection power. According to the government

the substance of the suit’ is directed at the alleged harm of having the IRS retain and use information about [appellant]’s virtual currency transactions for use in determining [his] compliance with his income tax obligations,” and “[t]he ‘relief requested’ is the expungement of information that would allow the IRS to do so.” (Emphasis added.) See CIC Servs., 141 S. Ct. at 1589 (“In considering a ‘suit[‘s] purpose,’ [courts] inquire not into a taxpayer’s subjective motive, but into the action’s objective aim — essentially, the relief the suit requests.”)

The First Circuit disagreed:

As the Court observed in CIC Services, however, “[t]he Anti-Injunction Act kicks in when the target of a requested injunction is a tax obligation — or stated in the Act’s language, when that injunction runs against the ‘collection or assessment of [a] tax.'” Id. at 1590. Here, the target of the requested injunction is the IRS’s continued retention of appellant’s personal financial information, which appellant alleges the IRS acquired in violation of the Constitution and 26 U.S.C. §7609(f)

Drilling even deeper into the nature and purpose of the AIA vis a vis the relief Harper sought, the court viewed his suit as not attempting to limit IRS’s ability to redetermine his tax:

Contrary to the IRS’s suggestion that appellant’s suit is “a ‘preemptive’ suit to foreclose tax liability” (which would be barred by the Anti-Injunction Act), this suit, like the suit at issue in CIC Services, “falls outside the Anti-Injunction Act because the injunction it requests does not run against a tax at all.”  Rather, “[t]he suit contests, and seeks relief from, a separate legal” wrong — the allegedly unlawful acquisition and retention of appellant’s financial records. Like the plaintiff in CIC Services, appellant “stands nowhere near the cusp of tax liability,”  and “the dispute is [not] about a tax rule,” where “the sole recourse” in light of the Anti-Injunction Act “is to pay the tax and seek a refund,.” 

Conclusion

This case is remanded back to the district court to consider whether Harper has stated a claim on which relief can be granted. That is an uphill battle. The IRS appears to have lawfully obtained the information through the summons process, but this interim victory is important as it reflects at least one circuit’s view that courts are to liberally apply CIC Services and not limit it to situations when third parties are challenging IRS’s information reporting obligations.

CIC Fallout: Anti Injunction Act Bars Motion for Protective Order

US v Meyer presents a somewhat unusual context for a court’s application of the Anti Injunction Act. Meyer stems from an injunction action due to allegations that Meyer promoted “an abusive tax scheme that result[ed] in scheme participants claiming unwarranted federal income tax deductions for bogus charitable contributions.” In 2018, the parties settled that suit and filed a joint motion for permanent injunction. The settlement expressly did not preclude the US from “pursuing other current or future civil or criminal matters or proceedings,” or preclude Defendant from “contesting his liability in any matter or proceeding.”

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Following the settlement, the IRS began a civil investigation and proposed approximately $7 million in Section 6700 civil penalties. Following the proposed assessment, Meyer sought a protective order from the federal district court that had previously been the forum for the injunction proceeding. In particular, Meyer alleged that the IRS’s computation of the proposed 6700 penalty improperly relied on admissions he had made in the injunction proceeding, in violation of Federal Rule of Civil Procedure 36(b). FRCP 36(b) provides that “an admission under [Rule 36] is not an admission for any other purpose and cannot be used against the party in any other proceeding.”

The request for a protective order was initially heard by a magistrate judge.  In April, that judge issued a report and recommendation concluding that Meyer’s request for relief was barred under the AIA. In so doing, the magistrate judge held that the AIA applied even though Meyer did not bring the suit but instead sought a protective order in a suit that the US had brought (recall that the AIA 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….”). Meyer had sought relief based upon a federal district court’s broad power under Fed Rule Civ Procedure 26 which upon a showing of “good cause,” provides that a court may issue a protective order providing a variety of remedies, such as precluding discovery altogether or “specifying terms … for the disclosure or discovery.”

In finding that the AIA barred the request for a protective order stemming from an alleged violation of Fed Rule Civ Procedure 36 from a government-brought injunction case, the magistrate noted that there was no case law squarely on point but looked to analogous cases applying the AIA where taxpayers sought to limit information that the IRS could use in civil proceedings. According to the magistrate, Meyer’s relief request was essentially requiring the IRS to recalculate the penalty and “preclude the IRS from using certain information to assess a tax penalty and is, therefore, impermissible under [the AIA].”

In finding that the AIA did not allow the court to issue a protective order, the magistrate punted on the issue as to whether Rule 36 had any impact on the IRS’s proposed penalty assessment, and whether a “proceeding” for Rule 36 purposes also included an IRS civil penalty examination.  The magistrate noted that the substantive issue could be teed up in a refund proceeding.

Following the magistrate’s report, Meyer timely appealed the recommendation, with the district court then as per Fed Rule Civ Procedure 72 reviewing the matter on a de novo basis. The federal district court judge affirmed and adopted the magistrate’s order, though the opinion is somewhat noteworthy because it addresses Meyer’s additional filings with the court briefly dismissing Meyer’s argument that CIC Services supported finding that the AIA did not apply:

In the present case, the relief Defendant seeks falls squarely within the contours of the Anti-Injunction Act—namely, to limit the information the IRS may consider in its assessment of $7,066,039.00 in tax penalties under  § 6700. See ECF No. [98] at 5 (requesting that the Court “issue an order preventing the Government and its client, the IRS, from using [Defendant’s] Rule 36 Admissions to support factual conclusions in the IRS’s Section 6700 Penalty examination.”); ECF No. [105] at 10 (“request[ing] that this Court enter an order directing the Government that it may not use the Defendant’s RFA Responses for any purpose other than as admissions in this proceeding.”) (emphasis in original); see also CIC Serv., 141 S. Ct. at 1593 (“suits sought to prevent the levying of taxes … [cannot] go forward.”). Thus, the Court agrees with [the magistrate judge’s] conclusion that Defendant’s Motion is barred under the Anti-Injunction Act.

Conclusion

As did the magistrate judge’s, the district court’s order ended with a statement that Meyer was not without recourse as he could bring a refund proceeding and thus get a court to address the merits of Meyer’s claim that Federal Rule of Civil Procedure 36(b) should bar the IRS from using admissions from a separate injunction in calculating a 6700 penalty in a civil exam. Of course, a refund suit is predicated on Meyer satisfying Flora, though the 6700 penalty has special statutory rules allowing for partial payment to secure court review.

More On The Implications of CIC Services

We are starting to see some fallout from last month’s CIC Services opinion. For example, Tax Notes’ Kristen Parillo discusses[$] Hancock Land Acquisitions v US , another microcaptive case. Parillo’s article explores the parties’ post CIC Services supplemental filings in a case where the taxpayer brought an action alleging that the IRS’s failure to refer its case to 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.” Immediately following the Supreme Court opinion, the government filed a supplemental brief claiming that CIC does not alter that the challenge is barred by the AIA, emphasizing that the partnership was not challenging a reporting obligation and that the relief requested was close to an assessment on the partners.

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The partnership responded, claiming that its challenge squarely fits in with the three CIC factors that led the Court to conclude that the challenge was not to a tax, including that its relief looks to a remedy for alleged violations of their procedural rights and that any impact on assessment or collection is just a downstream consequence.  

Earlier this week there was also a very interesting blog post on CIC Services in Notice & Comment, the administrative law blog. The post, Do you C what I C? – CIC Services v. IRS and Remedies Under the APA, from Professor Mila Sohoni, explores what CIC Services offers more broadly for admin law purposes: 

The Court’s opinion in CIC Services throws some much-needed light on two important points of contention within that debate: what do litigants mean when they ask a court to “enjoin” a rule or “declare” a rule “unlawful” in an APA action, and what does the APA mean when it says that a court may “hold unlawful and set aside” a rule?

For readers interested in those issues I suggest reading the brief but powerful post.  The post focuses mostly on APA 706 and whether APA violations can lead to vacating regs/rules in their entirety or rather a more narrow focus on the individual plaintiff. The takeaway from the post is that there has been some uncertainty in admin law circles on the scope of a federal court’s powers when in a preenforcement action it finds that an agency (not just the IRS) violates the APA. As Sohoni discusses the Sessions led DOJ in the Trump Administration issued litigation guidelines that adopted the narrow view. Others have argued that the courts have much broader powers to enjoin agency action. Sohoni argues forcefully that CIC Services provides support for the latter view:

The opinion in CIC Services shows that the Court does not hold this [the narrow] view of the meaning of “set aside.” Throughout its opinion, the Court treats “set aside” as a type of relief. (See, e.g., CIC Servs., slip op. at 4-5 (“So the complaint asks the court to ‘set[] aside IRS Notice 2016-66 …’”); id. at 11 (“the existence of criminal penalties explains why an entity like CIC must bring an action in just this form, framing its requested relief in just this way”). Moreover, the Court not only treats “set aside” as a kind of relief, but the Court also necessarily is using the term “set aside” in its conventional sense: to mean “invalidate,” not merely to “ignore.” 

These developments are just the opening rounds on the impact of CIC Services. Stay tuned.

Further Initial Thoughts on CIC Services

In this brief post and following on Professor Bryan Camp’s discussion, I offer some initial observations on the Supreme Court’s CIC Services opinion.  As Keith noted in his introduction to Bryan’s post, I am not disinterested in this issue-with the Harvard Clinic and on behalf of the Center for Taxpayer Rights I helped write an amicus brief seeking cert and another in support of the plaintiffs at the Supreme Court.

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I also come at the issue not as someone who reflexively believes that IRS action is improper, or that IRS systemically runs roughshod over the APA. I do think, however, that tax administration would benefit from a defined and prompt path for litigants to challenge IRS rulemaking apart from traditional enforcement proceedings.  Pre-enforcement challenges to agency rulemaking are the norm outside tax law. The CIC Services decision does not change the norm in tax administration, with the exception of some (or maybe all) challenges relating to information reporting rules. (Justice Kavanaugh’s concurrence offers a broader take on the opinion as he believes the opinion’s focus on the object of the suit rather than the downstream effect as the Court previously held in Americans United and Bob Jones blesses pre-enforcement suits challenging a regulation backed by a tax penalty; I will need to think further on this).

Why do I hedge though about challenges to information reporting? The opinion seems to offer wide berth to challenges to all information reporting regimes. To that end, see page 6 of the slip opinion, where the majority states that a “reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection.”

Later though it does leave the door ajar to distinctions when at page 9 it sets out a three part test to evaluate whether the action is a “tax action in disguise.” The three-part test is that 1) the regime imposes affirmative costs other than the underlying tax, 2) there are several steps between the reporting and any penalty that the IRS would impose on a party failing to report and 3)  there are potential criminal penalties for noncompliance.  For now I will focus on part two, that the reporting rule “and the statutory tax penalty are several steps removed from each other. “

The opinion notes that for CIC Services before any penalty could arise a number of steps must occur, including that CIC fails to provide the required information about the micro captive transactions, the IRS must determine that there has been a violation of the Notice, and then IRS must exercise its discretion to impose the penalty.  One question that lower courts will likely explore is whether the steps between not complying and possible penalty imposition are similar enough in other information reporting regimes to lead to a conclusion that a challenge to a different information reporting is to the reporting rather than a tax penalty.  That the CIC opinion did not explicitly address how its approach would affect for example the interest reporting regime that bankers challenged in the Florida Bankers case suggests perhaps some wiggle room, though on balance I think a better reading of the majority opinion is that there is little basis to offer a distinction with a difference. In my view, under the CIC approach, Florida Bankers comes out differently.

Similarly while Justice Sotomayor in her concurrence suggests perhaps a different outcome if the challenge related to a taxpayer’s own reporting (a distinction not made in the opinion), I think most of the likely challenges that will come from third parties anyway. No doubt that as Congress considers new statutory reporting rules on banks as part of its efforts to clamp down on the tax gap, I suspect we may soon see some opportunity to see bankers and other financial institutions mount fresh challenges.

While Bryan and I differ in our takes on the case, like Bryan I also think a fitting outcome would be for Congress to take a fresh look at the AIA and perhaps allow parties the opportunity to challenge tax rules or regulations in preenforcement proceedings (to that end see my post Is It Time To Reconsider When IRS Guidance Is Subject to Court Review? ) That post discusses such a proposal by Professor Kristin Hickman and Gerald Kerska as well as a separate proposal from Stephanie Hunter McMahon.