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.
read more...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.
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Cavanaugh tries to clarify the Court’s reasoning, and is fair in doing that, I think, but brings out its craziness:
In short, as I understand the Court’s opinion today, the rule going forward is that pre-enforcement suits challenging regulatory taxes or traditional revenue-raising taxes are still ordinarily barred by the Anti-Injunction Act. But pre-enforcement suits challenging regulations backed by tax penalties are ordinarily not barred, even though those suits, if successful, would necessarily preclude the collection or assessment of what the Tax Code refers to as a tax.
Suppose I want to challenge the rule requiring me to file an income tax return at all, as being a requirement to incriminate myself. Does the Anti-Injunction Act bar that? The injunction I ask for would largely prevents the collection of the tax (the IRS could still use my employer’s third-party reporting, etc.), but only indirectly, via reporting. The Supreme Court says in CIC Services that this suit would *not* be barred! To be sure, Sotomayor’ concurrence is worried about this and suggests that taxpayer reporting is different from third-party reporting, but she can’t think of a reason for the distinction, because there isn’t one.
“To be sure, Sotomayor’ concurrence is worried about this and suggests that taxpayer reporting is different from third-party reporting, but she can’t think of a reason for the distinction, because there isn’t one.”
US v. Sullivan and Garner v. US seem to recognize that the 5th Amendment protects a signer of a US tax return from being compelled to reveal certain protected information, but the 5th Amendment doesn’t protect a person from testimony by 3rd parties.
The CIC ruling seems to uphold the opposite of the 5th Amendment, but anyway there’s a distinction.
I’d welcome a post, perhaps by a distinguished tax professor but anonymous because it would necessarily be somewhat insulting to the Supreme Court, on why the Supreme Court has so much trouble with tax cases. CIC Services was not even a technical one in its issue, so it isn’t math ignorance and fear. The Court has lots of help from amici, many of whom are academics with no self-interest and no ideological or partisan interest in the cases they have the most trouble with (CIC Services, not the Obamacare cases, where none of us can be trusted to be free of bias). And for the same reason, the explanation isn’t that the Supreme Court is being political. So why does the Supreme Court get it wrong? Are they so used to amicus briefs being useless in con law cases that they don’t read them even in tax cases?
With all due respect, first, the Supreme Court got this one right, and second, academics often do have biases of all kinds, including in tax cases. As to the latter, if an academic has never practiced tax law, he or she may have little or no awareness of what happens (a) when facts are not clear or are susceptible to more than one meaning but the courts accept the government’s narrative, (b) when the tax result argued by the IRS is unfair as an economic matter, even if arguably correct, (c) when the cost of compliance is very high relative to the overall amount of tax involved or relative to the size of the transaction, or is otherwise an undue burden, and (d) when courts lean over backwards to favor the government (for example because the taxpayer has the burden of proof and/or the records are in disarray). I have not studied the academic literature exhaustively, but I find that what I encounter in articles and sometimes on bar association calls often gives overwhelming weight to the government’s need to collect revenue and is infused with the presumption that taxpayers who find themselves in court are likely to be cutting corners.
Bull v. US explains that the roles of plaintiff and defendant are reversed in tax matters because of the government’s need to collect revenue, but it doesn’t explain why courts can deny due process by dismissing refund suits for lack of jurisdiction.
On the other hand, if your item (c) mattered, FATCA would not exist.
Could be. I don’t know how common Academics vs. Appellate Judges is in tax cases- that would make for a great law review article by some old hand who’s followed these things for 30years. But the points you are making are about cases where the rule of law gives one result but convenience or policy gives another. If in tax law, law professors are standing up and saying “Follow the law” rather than “We have a living tax code,” that’s all to the good. Maybe the Supreme Court’s problem is that the justices and their clerks are just too results-oriented.
In CIC Services, for example, the Supreme Court issue is whether someone can get an injunction against a reporting requirement. It isn’t about whether the reporting requirement is a good idea or not, or even whether the IRS has exceeded its authority in issuing the requirement. Those are irrelevant.