Today, the Supreme Court handed down a unanimous opinion in CIC Services. The Court holds that the Anti-Injunction Act does not bar a suit challenging a IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty. Today, we bring an observation about the case from Professor Bryan Camp who has blogged with us several times before. Professor Camp filed an amicus brief with the Supreme Court in support of the government’s position that the AIA did bar this action. Soon, depending on how grading exams goes, we will publish a counterpoint to Professor Camp’s post by Les. Les joined the tax clinic at Harvard Law School in filing an amicus brief on behalf of the Center for Taxpayer Rights supporting the plaintiff in this case. Here is a copy of the amicus brief filed by Professor Camp and here is a copy of the amicus brief filed by the Center for Taxpayer Rights. We have previously blogged this case many times. A sample of prior posts can be found here (in a post by authors of another amicus brief in support of the government whom we hope might have more to say here in coming days), here and here.
read more...Here’s what it got wrong. Justice Kagan rests her opinion on a distinction between “information gathering” on the one hand and “assessment/collection” on the other hand. The Anti Injunction Act, 26 USC §7421, prohibits suits to restrain the latter, she says, not the former. All CIC Services was doing was seeking to restrain the IRS from collecting information from it.
Here’s why that’s wrong. Assessment is a process, not an event. And the process starts with reporting information to the IRS! Heck, lots of folks are doing that today. The wrinkle in this case is that it was not a taxpayer reporting information to the IRS; it was a third party (CIC Services). So the Court says hey, information reporting by taxpayers may be part of assessment (because the IRS, after all, assesses tax in large part based on the information taxpayers self-report). You see this most explicitly in Justice Sotomayor’s concurrence. But information reporting by third parties, says the Court, is not part of assessment or collection tax.
The heck it isn’t!
Saying that information reporting by third parties is different than information reporting by taxpayers reflects a deep confusion about tax administration. Congress created third-party information reporting requirements in the first place as an integral part of the tax assessment and collection process. When Congress re-started the income tax in 1913 it experimented with what we are now very used to: third party withholding of taxes. That’s what employers now routinely do for employees. But Congress got lots of blow-back for that. So it quickly abandoned the requirement for third parties to withhold actual dollars. Instead, Congress substituted third-party information reporting for withholding. This was in the War Revenue Act of 1917, 40 Stat. 300. The Senate Finance Committee explained that third-party information reporting was a “substitute for the previous collection strategy of tax withholding.” It was “conducive to a more effective administration of the law in that it will enable the Government to locate more effectively all individuals subject to the income tax and to determine more accurately their tax liability. This is of prime importance from a viewpoint of collections.” Sen. Rpt. 65-103 (August 6, 1917) at 20 (emphasis added).
Since 1917 Congress has added dozens and dozens of third-party information reporting requirements to the Tax Code. And always for the same reason: such reporting is integral, is vital, to the proper assessment and collection of tax. When the IRS did its tax gap studies it found that taxpayers are far more likely to properly self-report transactions (and the income from such transactions) when they know a third party is reporting as well. No duh! So that is why a suit attempting to restrain a third-party information reporting requirement is well within the scope of the Anti-Injunction Act’s prohibition against suits to restrain the “assessment or collection” of “any tax” regardless of whether the person suing “is the person against whom such tax was assessed.” That’s the language in §7421.
Here’s what getting it wrong means. As Justice Kavanaugh pointed out, this decision creates a new exception to the Anti Injunction Act. It will require litigation for courts to figure out just how big or small that exception is. For example, when Justice Kavanaugh was on the D.C. Circuit he authored an opinion in Florida Bankers Association holding for the IRS on a very, very, very similar issue. This CIC Services opinion nukes Florida Bankers. …or DOES it?? Hello litigation!
The bigger picture here is the Court is revisiting what it thinks should be the proper relationship of courts and the IRS. This decision allows courts to give greater and closer supervision of how the IRS administers the tax system. It has the potential to greatly slow down the IRS’s ability to detect tax cheats, such as the micro-captive insurance arrangements that CIC was promoting. That will lead to significant losses in tax revenue while companies like CIC will continue to be able to create and promote new ways for wealthy taxpayers to avoid paying taxes.
But there are two silver linings. First, the decision might spur Congress to actually revise the Anti-Injunction Act to bring it into the 21st Century. Congress wrote the AIA in 1867, after all and the basic operative language is unchanged. For example, there was no third party reporting in 1867 the way there is now. Second, even without the AIA, this ruling does not mean that courts will suddenly stop all third-party information reporting. A court will not enjoin the IRS from enforcing a contested reporting requirement unless the party seeking the injunction can meet the traditional requirements to obtain an injunction: (1) the party is likely to win on the merits; and (2) the party will suffer irreparable harm if the court does not enjoin.
I was going to say, “At least the guilty will suffer. By carelessly opening up this can of worms, the Supreme Court will have to hear more tax cases, instead of the crim procedure cases they love to go on about endlessly.”
But of course, that’s wrong. It’s the innocent appellate circuit judges who will suffer, and the Supreme Court will just refuse to clarify.
It’s a judge’s duty and obligation to follow the law as it is written. The old AIA should never been allowed to go this long without updating. It has become convoluted and misapplied with bias in favor of the agency over the years.
Thanks, Bryan. Thoughtful as always.
Another angle on CIC Services.
You have to be real careful what you ask for because you may get it.
An issue I have struggled with and blogged about after CIC Services on Monday is whether it can prove to be a problem, creating way more mischief than it seems to solve.
The problem is that CIC Services raised only procedural issues in its ultimate attack on the Notice’s information requirement — (i) that the information reporting requirement in the Notice was a legislative rule requiring that it be promulgated by notice and comment regulation (absent a good cause statement) and (ii) that the rule was in the notice was arbitrary and capricious under APA 706 / State Farm. To repeat, both of these are procedural challenges. Could an argument be made that those types of challenges (not just in the immediate setting) must be made within the 6-year statute of limitations in 28 USC § 2401(a), and if not raised taxpayers and others will no longer be able to challenge in a post-enforcement challenge outside that 6-year window (say by deficiency redetermination, refund suit, CDP, etc.? I think that, prior to CIC Services, such post-enforcement challenges could be made if, for no other reason than there was no pre-enforcement remedy. See SIH Partners LLLP v. Commissioner, 150 T.C. 28, 48 (2018), aff’d, 923 F.3d 296 (3d Cir. 2019) (involving 1964 regulations way outside the 6-year statute, if it applied in a preclusive way for procedural challenges). I confess that I do not know the answer to that question. I speculate, though, that given how draconian such a preclusive effect would be for procedural challenges not raised in the 6-year window, courts would work around it even if it were otherwise a problem created by CIC Services.
28 USC § 2401(a) says “Except as provided by chapter 71 of title 41, every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.” I don’t know much about statutes of limitation law. Would this, however, bar action against the IRS based on the APA if, say, the IRS issued an unlawful regulation 10 years ago, but the plaintiff only had to start complying with it 2 years ago? (say, because plaintiff is a newly formed corporation?)
Eric, you asked: “Would this, however, bar action against the IRS based on the APA if, say, the IRS issued an unlawful regulation 10 years ago, but the plaintiff only had to start complying with it 2 years ago? (say, because plaintiff is a newly formed corporation?).”
That is the question. In the past there was only post-enforcement review and that type of review had a separate statute of limitations. Now, if there is pre-enforcement review for some IRS action, for action that could qualify for pre-enforcement review, will the 6-year statute be preclusive for claims that could have been raised but were not.
Of course, in your example, with a new corporation that was not within the scope of the agency action until created, arguably, the statute could not start until it “accrued” and that would logically be when the corporation was created and thus subject to the agency action.
Still some uncertainty there.
I agree that the AIA and TIA need to be updated, specifically, they need to be repealed or severely limited. When they were enacted, there was no information reporting, but there also was no viewpoint discrimination in granting or slow-walking 501(c)(3) applications, no sense that tax laws that are “necessary” can be enacted despite constitutional mandates to the contrary (wealth tax, Wash. State capital gains tax), and no out-of-control Treasury writing overbroad, vague and arguably illegal regulations. The requirement that an injunction will not issue unless the taxpayer can show irreparable harm and a likelihood of winning on the merits is sufficient to protect the IRS in its collection and enforcement roles. You want information? Fine, but only as long as the regulation demanding it complies with the APA. Those who disagree should ask themselves what result under the AIA if the IRS announces that it is imposing a 70% marginal rate on incomes > $10mm on the basis that the IRS expects Congress to enact that retroactively within the next few years? Think that’s an outlandish example? How about requiring estates and heirs now to treat section 1014 as having been repealed because “it is inevitable, and if it is retroactive, the IRS has no way to collect the money if it has not been deposited now”? Or a regulation, without any statutory authority, imposing a “user fee” on incomes above $1mm to fund the cost of more audits? At some point, one encounters a potential action by the IRS that is as plausible in today’s polarized times as it is illegal, even if it would never have been contemplated ten or twenty years ago. The AIA as written bars an action to restrain the IRS from assessing and collecting the tax no matter how destructive to a particular taxpayer and no matter how ridiculous the IRS’s position is.
Good points. Was the AIA *ever* a good statute? Does anybody think it is now? Kristin Hickman’s detailed and careful argument (which— am I right on this?— the Supreme Court totally ignored even though they could have used it to support their desired result) is that the AIA was meant to stop misbehavior by courts slowing down tax collection during the Civil War (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3658611). You are persuasive that standard preliminary injunction doctrine should be enough to deal with the problem— and Congress could even require them to be issued in tax cases only by Tax Court, if we don’t trust district court judges.
I would not at all rely on Kristen’s article. It contains significant errors and omissions. For example, it omits entirely any analysis or even consideration of early AIA cases, including the first S.Ct. decision interpreting the AIA. Those cases interpreted the AIA very broadly. It also commits significant error in recounting the AIA’s legislative history. I explain the errors and omissions in my amicus brief in CIC Service which you can find here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3672481 That is why the S.Ct. likely “ignored” her article.