Why a Win for CIC Services Would Be a Win for Tax Shelters

We welcome a group of guest bloggers who filed an amicus brief in CIC Services earlier this week.  Professors Susie Morse, Clint Wallace and Daniel Hemel and attorneys at Gupta Wessler filed a brief on behalf of former government officials Lily Batchelder, Mark Mazur, Eileen O’Connor, Leslie Samuels, Stephen Shay and George Yin.  Today, they provide us with an explanation of why the Supreme Court should uphold the decision of the 6th Circuit, which held that the Anti-Injunction Act bars CIC Services’ suit.  The Supreme Court has now scheduled this argument for December 1, 2020.  Keith

This week, a group of former government officials filed an amicus brief in support of the government in CIC Services v. IRS, the Anti-Injunction Act case before the Supreme Court this term. The case involves a tax shelter promoter that seeks to prevent the IRS from imposing penalties on the promoter and its clients if they fail to comply with tax-shelter reporting requirements. A ruling for CIC Services would, as the Solicitor General emphasizes in its brief, go a long way toward gutting the 153-year-old Anti-Injunction Act. It would also—as our brief demonstrates—deal a serious blow to the IRS in the agency’s decades-long battle to combat abusive tax shelters.


Ever since the first wave of abusive tax shelters gathered momentum in the 1960s, Congress has taken a series of actions to give the IRS tools to fight back. Those include the at-risk rules in the Tax Reform Act of 1976, the passive activity loss limitations in the Tax Reform Act of 1986 and, at issue here, the reportable transaction disclosure regime in the American Jobs Creation Act of 2004. Specifically, in the 2004 law, Congress required tax shelter promoters and their clients to disclose certain large-dollar shelter transactions to the IRS, and it enacted new penalties so that those disclosure requirements had teeth. Of particular importance to this case, Congress placed those penalties in Subchapter 68B of the Code, which means that they qualify as “taxes” for purposes of the AIA.

The disclosure regime was, by most accounts, a resounding success. Prior to the disclosure rules, the IRS often found itself “looking for the tax shelter needle in the haystack of a complicated business tax return.” By requiring parties who arrange and participate in specific potentially abusive transactions to identify themselves to the IRS or face stiff penalties, Congress made it possible for the IRS to find the needle. To be sure, taxpayers still have the opportunity to argue that their transactions claim legal tax benefits. What they can’t do any more is keep their transactions outside the IRS’s view.

The reportable transaction scheme is designed to be agile. Congress wanted the IRS, upon learning of a new shelter, to require disclosure from promoters of the shelter and their clients. Congress specifically blessed the IRS’s practice of issuing reportable-transaction designations under already-existing authority (section 6011). That regime provides for issuance of designations by the IRS via notice in the Internal Revenue Bulletin—backed by penalties under the AJCA for failure to comply. Indeed, the IRS has designated dozens of transactions in this way, starting before Congress enacted the penalties for failure to report in the AJCA and continuing in recent years. CIC Services’ substantive argument is that the IRS should promulgate these notices through Administrative Procedure Act rulemaking rather than relying on the section 6011 framework. We think the AJCA endorsed the IRS’s approach. But in any event, the only issue here is whether CIC Services can obtain a pre-enforcement injunction that would block the IRS from imposing penalties for nondisclosure.

Allowing pre-enforcement challenges to these penalties—i.e., allowing taxpayers to challenge reportable transaction designations and to delay revealing to the IRS their participation in such transactions—would have severe consequences for the effort to fight abusive tax shelters. As we detail in our brief, injunctions of the sort that CIC Services seeks would yield three specific effects. First, they would prevent the IRS from detecting many abusive transactions. Second, when injunctions delayed detection, it would be likelier that the statute of limitations would lapse before the IRS could assess taxes that are rightfully owned. Third, in cases where the IRS is able to assess taxes before the statute of limitations runs out, delaying assessments would increase the risk of non-collection. The longer the delay, the likelier it is that taxpayers will have spent down their assets or moved their wealth beyond the IRS’s reach.

The petitioner wants to cast its effort in a different light. By its telling, the case has nothing to do with tax shelters at all. Petitioner tells the Court in its brief that its micro-captive products allow for “customized” risk management and a “more seamless claims process,” though it advertises itself to clients as a provider of a “legal tax shelter” that “can often double a business owner’s wealth.”

As readers of Procedurally Taxing know, petitioner’s argument received support from Professors Fogg and Book, who joined with the Center for Taxpayer Rights in an amicus brief opposing the Sixth Circuit’s interpretation of the AIA. Their brief argues that low-income taxpayers are especially disadvantaged when forced to rely on the AIA’s required remedy of post-enforcement judicial review. As Professor Fogg has written, under the Flora full-payment rule, in practice this can mean that post-payment judicial review for low-income taxpayers who face failure-to-report penalties is out of reach. And as Professor Book has written, the government’s approach to enforcing the tax law applicable to low-income taxpayers may excessively target taxpayers who make unintentional mistakes and lack access to constructive government guidance about how to comply.

Like Professors Fogg and Book, the authors of this blog post are concerned about the interaction between tax law enforcement and the situations faced by low-income taxpayers. But we think the remedy is to relax the full-payment rule in cases where it forces hardship for low-income individuals, and not to exempt CIC Services from the Anti-Injunction Act’s plain text.

The immediate result of a ruling for CIC Services would be to make it easier for tax-shelter promoters and their predominantly high-income clients to avoid paying the taxes they owe. That would result in less revenue overall, and more of the federal tax burden would be borne by lower-income taxpayers. The distributive result would be regressive.

Also, a ruling for petitioner is unlikely to provide relief for low-income taxpayers fighting the IRS. Petitioner’s theory is that it is challenging a “regulatory mandate” unrelated to its own tax liability. “Win or lose,” petitioner says in its brief, “the IRS will collect no additional revenue from CIC.” Petitioner accepts that taxpayers litigating about their own liabilities are covered by the Anti-Injunction Act but asks the Court to distinguish tax shelter promoters like CIC Services who are litigating about penalties for failure to disclose other taxpayers’ transactions. 

We agree with the government that the distinction that CIC Services draws is not a valid one. (Whether CIC Services wins or loses will affect the ability of the IRS to collect penalties from CIC Services itself under §§ 6707 and 6708—penalties that Congress has deemed to be taxes.) But let’s imagine that the Court disagrees and accepts CIC Services’ argument. That helps tax shelter promoters, but what does it accomplish for low-income taxpayers seeking to claim the earned income tax credit or the child tax credit? They are arguing about their own taxes and tax credits. 

In addition, a ruling for the government in CIC Services would leave undisturbed any equitable exceptions to the Anti-Injunction Act, which would allow low-income taxpayers to seek prepayment remedies in a case of clear government overreach. In the Bob Jones case, the Court said that such an equitable exception could be available where a plaintiff can show both a “certainty of success on the merits” and “irreparable injury.”  CIC Services has not sought that exception, and as our brief argues, it would not be eligible anyway. But Bob Jones may provide relief for low-income taxpayers in situations like the ones that Professors Fogg and Book highlight.  

The AIA lies at the foundation of federal tax administration and the modern tax shelter disclosure regime. That regime relies on a nimble IRS, backed by the threat of penalties for failure to disclose. Permitting tax shelter promoters to resist disclosure requirements with strategic lawsuits and pre-enforcement injunctions would mean trouble for tax collection.

The Chamber of Commerce Has an Anti-Injunction Act Problem

Today’s post is by Professor Daniel Hemel the University of Chicago Law School. Daniel discusses the Chamber of Commerce’s lawsuit that challenges the recently promulgated regulations addressing corporate inversions. In an upcoming article in the Cornell Law Review, The President’s Power to Tax, Daniel examines an area that scholars have largely left unaddressed, as he looks at reasons why the Executive Branch has been reluctant to take actions in the tax arena through regulatory power. This post looks at one aspect of executive power, the inversion regulations, and looks at the Anti-Injunction Act’s role in preventing suits to challenge the validity of  those regulations. We have previously discussed the Anti-Injunction Act and state of flux characterizing this nook of tax procedure (a good place to start is Pat Smith’s two part post last year on the apparent inconsistency between the Direct Marketing and Florida Bankers cases). As Daniel describes, despite some chinks in the armor, the Anti-Injunction Act is alive and well and is a powerful tool to combat pre-enforcement challenges to Treasury guidance.


 This post originally appeared in the blog Whatever Source Derived.

The Chamber of Commerce filed a lawsuit in federal district court in Texas Thursday seeking to block the Treasury Department’s April 2016 inversion regulations. The Chamber says that the inversion regulations exceed Treasury’s statutory jurisdiction, that the regulations are arbitrary and capricious in violation of the Administrative Procedure Act (APA), and that Treasury failed to follow the APA’s notice-and-comment requirements. The last of these arguments isn’t frivolous: Treasury certainly could have done more to explain why it was implementing the new rules immediately rather than first allowing 30 days for comment. But whatever one thinks of the Chamber’s notice-and-comment argument, it shouldn’t matter: the Chamber’s complaint has a fatal flaw.


The problem for the Chamber is the pesky Tax Anti-Injunction Act (TAIA), 26 U.S.C. § 7421, which reads (in relevant part):

[N]o 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.

The statute lists a number of specific exceptions — none of which even arguably applies here. It establishes a general rule that in order to challenge the assessment or collection of a federal tax, a taxpayer must wait until the IRS actually assesses and attempts to collect the tax, at which point the taxpayer may (a) file a petition in Tax Court challenging the notice of deficiency or (b) pay the tax and then sue for a refund in federal district court or the Court of Federal Claims.

On its face, the TAIA plainly applies to the Chamber’s suit. The Chamber is asking the district court to set aside Treasury’s “Multiple Acquisition Rule,” 26 C.F.R. § 1.7874–8T, which was an element of the April regulations. The Multiple Acquisition Rule says that any stock issued by a foreign corporation in prior acquisitions of U.S. entities over the previous three years shouldn’t be counted when calculating whether a pending acquisition of a U.S. entity qualifies as an inversion. Treasury promulgated the rule pursuant to its regulatory authority under 26 U.S.C. § 7874, which imposes a tax on the “inversion gain” of expatriated entities. A foreign corporation’s acquisition of a U.S. corporation is an inversion for purposes of § 7874 if, after the acquisition, at least 60% of the vote or value of the combined entity is held by former shareholders of the U.S. corporation (among other criteria). “Inversion gain” includes income from the sale of the former U.S. corporation’s stock or property to foreign affiliates over the 10 years following the acquisition (among other items).

So in a nutshell, the Chamber is asking the district court to restrain the IRS from assessing and collecting the § 7874 tax on inversion gain with respect to foreign corporations that fall within the statute’s scope by virtue of the Multiple Acquisition Rule. That sure sounds a lot like a “suit for the purpose of restraining the assessment or collection of any tax.” How, then, does the Chamber plan to get around this?

Friend and JREG Notice & Comment co-blogger Andy Grewal suggests that the Chamber’s strategy might involve the Supreme Court’s 2015 decision in Direct Marketing Association v. Brohl. In Direct Marketing Association, the Court held that the Tax Injunction Act, the state tax equivalent of the TAIA, did not bar a challenge to a Colorado law requiring (mostly out-of-state) retailers to notify Colorado customers of their potential use tax liability and requiring the retailers to report tax-related information to Colorado authorities. The Court emphasized that the Colorado law imposed “notice and reporting requirements” — and not any tax liability — on the retailers.

The Chamber’s suit, by contrast, does not attack any notice or reporting requirements. It attacks the requirement that foreign corporations pay tax on inversion gains after they acquire U.S. entities in qualifying transactions.Direct Marketing Association is inapposite. This is a straight-up challenge to a tax.

Perhaps the Chamber will argue that unless a court addresses the validity of the Multiple Acquisition Rule now, no foreign corporation will acquire a U.S. corporation in a transaction that might trigger the § 7874 tax on inversion gain — the stakes are simply too high for anyone to run that risk. And indeed, Allergan (technically an Irish corporation) and Pfizer (U.S.) called off their merger in April precisely for that reason. But as the Supreme Court said in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 6 (1962), and reaffirmed in Bob Jones University v. Simon, 416 U.S. 725, 745 (1974), the TAIA “may not be evaded ‘merely because collection would cause an irreparable injury, such as the ruination of the taxpayer’s enterprise.’” That’s harsh — but so it goes.

Many readers will remember that Chief Justice Roberts danced around a TAIA issue in NFIB v. Sebelius, 132 S. Ct. 2566 (2012), en route to upholding the Affordable Care Act’s individual mandate and limiting the ACA’s Medicaid expansion. The Chief Justice said there that the TAIA didn’t apply because Congress decided to label the individual mandate provision a “penalty” rather than a “tax.” I had qualms about that holding at the time, but in any event it’s of no help to the Chamber here: Congress labeled § 7874 as a “TAX ON INVERSION GAIN OF EXPATRIATED ENTITIES.” Not much ambiguity about that.

In short, the lifespan of the Chamber’s suit should be short: the Chamber’s claims are barred by the TAIA. But while the suit is still alive, let’s revel in the irony. The Chamber is arguing that Treasury promulgated its rule too hastily, without observing the proper procedure. And yet the Chamber is filing its challenge hastily, without . . . (you can finish the sentence).