She then addressed the issue of whether the fact that the penalty for violation of the reporting requirement is treated as a tax for purposes of the Anti-Injunction Act has the consequence that the Florida Bankers challenge is barred by the Anti-Injunction Act. She concluded that this issue had already been decided by the D.C. Circuit in Seven-Sky. That case held that when a plaintiff challenges a regulatory requirement that is enforced by a penalty that is treated as a tax for purposes of the Anti-Injunction Act, such a challenge is not barred by the Anti-Injunction Act, because the challenge relates to the regulatory requirement rather than the penalty. Putting this in the terms of the Direct Marketing analysis, the challenge could not possibly relate to the assessment or collection of a tax because the act that would give rise to liability to pay the penalty, namely a violation of the reporting requirement, has not occurred.

Judge Henderson also concluded that Bob Jones and Americans United were factually distinguishable from Florida Bankers because there was a much closer connection in those cases between the challenge to the revocation of tax-exempt status and the effect a successful challenge would have on the tax liability of the contributors to the organizations than any connection between the challenge in Florida Bankers and actual tax liability. Thus, contrary to the argument made by the government in its footnote in its reply brief in Z Street, it is not necessary to conclude that Direct Marketing has implicitly overruled those cases in order to apply the reasoning in Direct Marketing in interpreting the Anti-Injunction Act.

Judge Henderson also concluded that the 1987 D.C. Circuit decision in Foodservice, which was cited in the district court opinion, is directly on point and supports the conclusion that the Anti-Injunction Act does not apply to the Florida Bankers challenge. Finally, she noted that it would be particularly inappropriate to hold that the only way to challenge the information reporting requirement at issue in Florida Bankers is for a bank to violate the requirement, pay the resulting penalty, and sue for a refund of the penalty, in light of the fact that section 7203 of the Code makes willful violation of reporting requirements such as this one a misdemeanor.

With respect to Judge Kavanaugh’s majority opinion in Florida Bankers holding that the Anti-Injunction Act does apply to bar the Florida Bankers challenge, I could have understood how a judge might have agreed with the position taken by the government in the footnote in it Z Street reply brief, namely, that since the Direct Marketing decision did not say anything explicit about what effect the decision might have on the Bob Jones and Americans United holdings, as a consequence, the more prudent course of action for a lower court judge would be to wait until the Supreme Court has explicitly addressed the issue. While I do not agree with that position, since the reasoning in Direct Marketing is so clear and so obviously applicable under the Anti-Injunction Act as well as under the Tax Injunction Act, nevertheless, I can at least understand how a reasonable judge might hold that position.

However, that is not the approach Judge Kavanaugh took in his majority opinion. He did not attempt to engage with the reasoning in Direct Marketing at all. Instead, he distinguished Direct Marketing based on a point that had played no role at all in either the briefing of the case or in the Supreme Court’s opinion, namely, the contention that the penalty for violation of the reporting requirement in Direct Marketing was not a tax for purposes of the Tax Injunction Act, whereas the penalty for violation of the reporting requirement in Florida Bankers clearly is a tax for purposes of the Anti-Injunction Act.

While it might at first seem very surprising that the same judge who wrote such a strong opinion invalidating a regulation issued by the IRS and Treasury in Loving v. IRS 742 F.3d 1013 (D.C. Cir. 2014).could write as weak and misguided an opinion as the majority opinion in Florida Bankers. This result seems somewhat less surprising, however, when viewed in the context provided by Judge Kavanaugh’s opinions in other cases involving the Anti-Injunction Act. He wrote dissenting opinions addressing the Anti-Injunction Act issues in both the panel and en banc decisions in Cohen as well as in Seven-Sky.

One final collateral issue that was addressed briefly by both Judge Kavanaugh and Judge Henderson is the issue of whether the restriction imposed by the Anti-Injunction Act is jurisdictional. As both judges note, prior D.C. Circuit opinions characterize the restriction as jurisdictional, but as Judge Henderson points out, a line of Supreme Court decisions in recent years has called into question the loose analysis that has traditionally been applied in deciding whether particular statutory requirements for bringing suit are or are not jurisdictional, and this line of authority would often result in characterizing as non-jurisdictional certain requirements that may traditionally have been viewed as jurisdictional.

While the Tax Injunction Act is clearly jurisdictional, the reason for that conclusion rests on one point on which the Tax Injunction Act and the Anti-Injunction Act differ, namely, the fact that the Tax Injunction Act explicitly restricts the ability of district courts to hear the type of cases the Act covers, whereas the Anti-Injunction restricts only the ability of parties to maintain such suits. This difference should lead to the conclusion that the Anti-Injunction Act is not jurisdictional. I developed this position at length in a Tax Notes article written in the context of the issue that was subsequently resolved by the Supreme Court in NFIB v. Sebelius.

As noted at the outset, in light of the weakness of Judge Kavanaugh’s majority opinion, the strength of Judge Henderson’s dissenting opinion, the clear conflict between the analysis and conclusion in the majority opinion and the Supreme Court’s Direct Marketing decision, and the conflict between the majority opinion and numerous prior D.C. Circuit decisions, such as Z Street, Cohen, Foodservice, and Seven-Sky, the Florida Bankers decision is a very strong candidate for en banc review.

Florida Bankers is a challenge by two bankers associations to the validity of regulations issued by the IRS and Treasury requiring U.S. banks to report to the IRS information concerning interest earned by non-resident aliens on accounts they hold in the banks. Although this interest is not subject to income taxation in the U.S., the IRS and Treasury claim the reporting requirement is necessary in order to make it possible for the U.S. to comply with information sharing agreements it has entered into with other countries that benefit the U.S. by providing information on bank accounts held by U.S. citizens in banks in those countries.

The bankers associations argue that in issuing the regulations, the IRS and Treasury violated the Administrative Procedure Act’s arbitrary and capricious standard under 5 U.S.C. § 706(2)(A) by failing to give sufficient weight to the likelihood that some non-resident aliens would respond to the information reporting requirement by withdrawing funds from U.S. banks, not because they wish to avoid paying tax to their home countries on the interest earned on the accounts, but instead because they fear the information either will be misused by their home country governments or will not be protected by those governments against misuse by others. In the district court, the government argued that the suit was barred by the Anti-Injunction Act, section 7421(a) of the Internal Revenue Code, which provides that, with certain exceptions, such as Tax Court deficiency actions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”

The government argued that even though the information that the banks were required to report related to interest that is not subject to income taxation in the U.S., nevertheless, the Anti-Injunction Act applied to bar the suit because of the penalty that banks would be subject to if they failed to comply with the reporting requirement that is imposed by the regulations, and because this penalty is treated as a tax for purposes of the Anti-Injunction Act, under section 6671(a) and the Supreme Court’s decision in NFIB v. Sebelius. The district court held that the Anti-Injunction Act did not apply for several reasons ( Les’ January 2014 post discussing the district court opinion, with links to that decision, can be found at APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius).    First, the penalty would be imposed only if one of the banks that are members of the associations that brought the challenge violated the reporting requirement, but none of these banks has either violated the requirement or threatened to do so. The challenge is not to the penalty but rather to the reporting requirement itself. Second, the D.C. Circuit, in a 1987 decision, Foodservice and Lodging Institute, Inc. v. Regan, had held that a challenge to the validity of another information reporting requirement that did not relate directly to the assessment or collection of taxes but, that was subject to the same penalty that applied to the information reporting requirement at issue in Florida Bankers, was not barred by the Anti-Injunction Act. Finally, in Seven-Sky v. Holder, the D.C. Circuit decision addressing the same issue subsequently decided by the Supreme Court in NFIB v. Sebelius, the D.C. Circuit had noted that the Anti-Injunction Act “has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement.” 661 F.3d 1, at 9 (D.C. Cir. 2011).

However, the district court rejected the challenge on the merits. I have explained in two Tax Notes articles here and here why I believe the district court’s decision on the merits was incorrect. However, the D.C. Circuit did not reach the merits. Instead, the majority opinion, written by Judge Kavanaugh, held the suit was barred by the Anti-Injunction Act, and while the dissenting judge, Judge Henderson, disagreed with that conclusion, nevertheless, she did not express a view on the merits.

As noted earlier, the majority opinion in Florida Bankers is incorrect because it is clearly at variance with a Supreme Court decision that was issued in March of this year. Less than a month after the February oral argument in Florida Bankers, the Supreme Court issued its opinion in Direct Marketing Association v. Brohl. As I noted in a post here soon after that decision was issued and at greater length in a subsequent Tax Notes article, while the Direct Marketing decision did not deal directly with the Anti-Injunction Act, but instead with a different provision, the Tax Injunction Act, in a different title of the United States Code, a provision that imposes restrictions similar to those in the Anti-Injunction Act on the jurisdiction of federal district courts to hear cases involving taxes imposed by the states, nevertheless, the strong similarities between the two provisions, and the nature of the Court’s reasoning in the Direct Marketing decision, support the conclusion that the Court’s analysis in Direct Marketing would be equally applicable with respect to the Anti-Injunction Act.

Like the Anti-Injunction Act, the Tax Injunction Act prohibits suits that would “restrain” the “assessment” or “collection” of taxes. In Direct Marketing, the Court held that because the two provisions are so similar, and because the Tax Injunction Act was modeled on the Anti-Injunction Act, the words in the Tax Injunction Act should be given the narrow, technical meaning those words have in the Internal Revenue Code. According to the Court, in the Internal Revenue Code, the words “assessment” and “collection” refer to well defined and specific phases of the overall process of obtaining tax revenue, and information reporting is not part of either of those phases, even where the information being reported bears directly on someone’s tax liability. In addition, according to the Court, the word “restrain” does not mean that any suit that might have the effect of “inhibiting” the collection of state tax revenue is barred by the Tax Injunction Act.

As a result of the foregoing reasoning, the Colorado statute that was being challenged in Direct Marketing, which required out-of-state retailers to provide the state with information reports on their sales to residents of the state, was not sufficiently closely connected with the collection or assessment of tax for the challenge to be barred by the Anti-Injunction Act. Although the Court had ruled in two cases in 1974, Bob Jones University 416 U.S. 725 (1974). and Americans United 416 U.S. 752 (1974), that suits challenging the IRS’s revocation of the tax-exempt status of an organization was barred by the Anti-Injunction Act because of the effect that the challenge would have, if it were successful, on the deductibility by contributors to the organization of their contributions, and although those decisions have been interpreted by the Courts of Appeals to mean that the Anti-Injunction Act bars any suit that, if successful, could have any sort of negative effect on the collection of tax revenue, nevertheless, the reasoning and the conclusion in Direct Marketing are clearly inconsistent with that type of broad reading of the Anti-Injunction Act.

Another recent D.C. Circuit decision involving the application of the Anti-Injunction Act is Z Street v. Koskinen 791 F.3d 24 (D.C. Cir. 2015). In this case, in contrast to Florida Bankers, both the oral argument and much of the briefing came after the Direct Marketing decision. I discussed the opinion in this case in an op-ed at TaxProf Blog, and I discussed the oral argument in this case in my Tax Notes article that discussed the Direct Marketing decision. (Les also wrote on the Z Street DC Circuit opinion here).

This case involved a challenge by an organization that had applied to the IRS for tax-exempt status to a delay in processing the application that the organization alleged was caused by an “Israel special policy” that the IRS allegedly applies in processing tax exemption applications by organizations with an interest in Israel. Under this alleged policy, organizations with views on Israel that do not coincide with those of the administration are treated less favorably, at least in terms of the speed with which the applications are processed, than organizations whose views on Israel coincide with those of the administration.

The government filed a motion to dismiss the case in the district court on the grounds that the suit was barred by the Anti-Injunction Act. The applicability of the Anti-Injunction Act was the only issue before the D.C. Circuit. Because of the procedural posture of the case, the court was required to assume the correctness of the organization’s allegations regarding the existence of an “Israel special policy.”

At the oral argument, the panel was clearly very hostile to the position taken by the government. The panel expressed unhappiness with the fact that the government’s reply brief, which was filed after the Direct Marketing decision, had referred to that decision only in a footnote. That footnote argued that since the Direct Marketing decision had not cited the Bob Jones or Americans United decisions, the Direct Marketing decision should not be read as overruling those decisions by implication. The questions and comments by the panel at oral argument suggested that they viewed the Direct Marketing decision as being centrally relevant to the issue in Z Street.

Based on the oral argument, it was no surprise that the D.C. Circuit opinion in Z Street held the Anti-Injunction Act inapplicable to the case. However, the tone of the opinion was considerably milder than might have been expected based on the oral argument. In addition, the decision that the Anti-Injunction Act did not apply was not based on the Direct Marketing decision, but rather on the Supreme Court’s 1984 decision in South Carolina v. Regan, 465 U.S. 367 (1984) which held that the Anti-Injunction Act does not apply in cases where the party challenging IRS action has no other mechanism for bringing its challenge than a suit in district court. The D.C. Circuit panel held that the suit Z Street had brought in district court was the only way the organization could challenge the alleged IRS delay in processing the application.

While the Z Street opinion did not rely on Direct Marketing for its conclusion that the Anti-Injunction Act did not apply, nevertheless, there is important dictum in the Z Street opinion bearing on the relevance of Direct Marketing for the interpretation of the Anti-Injunction Act. In response to the government’s argument that Bob Jones and Americans United require a broad application of the Anti-Injunction Act under which the only way tax issues can ever be litigated is through tax refund suits and Tax Court proceedings specifically authorized by provisions of the Internal Revenue Code, the Z Street opinion noted that the D.C. Circuit had previously rejected this position in 2011 in its en banc opinion in Cohen v. United States 650 F.3d 717 (D.C. Cir. 2011). In that case, the en banc D.C. Circuit held that a suit challenging the validity of a procedure adopted by the IRS for refunding taxes that had been improperly collected was not barred by the Anti-Injunction Act. I discussed the Cohen decision in a Tax Notes article in 2011. In Z Street, the court noted that “[I]n Cohen we rejected this view of ‘a world in which no challenge to [the IRS’s] actions is ever outside the closed loop of its taxing authority.’”

Z Street then had the following observations on Direct Marketing:

Our rejection of the Commissioner’s broad reading of the [Anti-Injunction] Act finds support in the Supreme Court’s recent decision in Direct Marketing Association v. Brohl. There, interpreting the Anti-Injunction Act’s cousin, the Tax Injunction Act, which serves a similar function for federal court challenges to state taxes, the Court read “restrain” in that statute as having a “narrow[] meaning…captur[ing] only those orders that stop…assessment, levy and collection” rather than “merely inhibit” those activities….Brohl’s holding is significant here because the Court “assume[s] that words used in both Acts are generally used in the same way.”

Against this background, it would have been expected that Direct Marketing would play a central role in the D.C. Circuit opinion in Florida Bankers. And, in fact, Direct Marketing plays a central role in Judge Henderson’s dissenting opinion. Much of this dissenting opinion is what I would have expected to read in a unanimous opinion for the panel. Judge Henderson’s dissenting opinion is nearly twice as long as Judge Kavanaugh’s majority opinion. In tomorrow’s second part to the post, I will discuss the dissenting opinion, and how in my view the dissent’s view is correct in light of the developments I have discussed today.

The district court decision is in a suit brought under the FTCA by Snyder & Associates Acquisitions LLC (“Snyder”), a financial lender that provides refund anticipation loans (“RALs”) to taxpayers, whereby Snyder lends money to taxpayers based on their expectation of receiving tax refunds. Snyder obtains prospective borrowers through referrals from tax return preparers.

Snyder determined that one of the referrals was using a fraudulent identity and issued stop payment orders on all the loan checks issued to customers referred by the same tax return preparer. When Snyder contacted that tax return preparer, she told Snyder that she was working with the IRS in an undercover sting operation to identify instances of fraudulent tax returns. The IRS agent with whom she was working asked Snyder to cancel the stop payment orders in order to assist the investigation and assured Snyder that it would not suffer any losses as a result of their cooperation with the investigation. However, the IRS did not make good on the $2.6 million in losses Snyder claimed to have suffered as a result of its cooperation with the investigation.

The district court agreed with the government that Snyder’s FTCA suit was barred by the tax exception to the FTCA (See Ama Sarfo, IRS Cooperator Left To Eat $2.6 Cost In Fraud Investigation, Law360, June 3, 2015). The district court agreed with the government that the interpretation of the tax exception was governed by cases such as Capozzoli v. Tracey 663 F.2d 654, 658 (5th Cir. 1981), which have held that the tax exception is applied broadly to “encompass any activities of an IRS agent even remotely related to his or her official duties.”

However, the connection to Direct Marketing is that cases such as Capozzoli v. Tracey clearly rely on the interpretation given to the Anti-Injunction Act by Bob Jones University as the basis for their interpretation of the tax exception to the FTCA:

The language of 28 U.S.C. § 2680(c) is identical to that of another U.S.Code provision, 26 U.S.C. § 7421(a), which prohibits any “suit for the purpose of restraining the assessment or collection of any tax” (emphasis added). In construing Section 7421(a), the Supreme Court in Bob Jones University v. Simon, 416 U.S. 740 (1974) interpreted the phrase “assessment and collection of taxes” broadly to preclude judicial interference with any phase of IRS activities. We believe that both 26 U.S.C. § 7421(a) and 28 U.S.C. § 2680(c) reflect the government’s strong interest in protecting the administration of its tax system from the burden of constant litigation. This interest would be completely frustrated if we were to read Section 2680(c) as providing an immunity for only certain narrowly defined activities of the IRS.

Capozzoli v. Tracey 663 F.2d 654, 657 (5th Cir. 1981).

If, as I believe, the Direct Marketing decision means that the Anti-Injunction Act will no longer be given the broad reading suggested by Bob Jones University, the same conclusion holds for the tax exception to the FTCA. Under the narrow interpretation of the tax exception to the FTCA that Direct Marketing would suggest, it seems very clear that the facts in the Snyder case would not come within the tax exception, since fraudulent tax returns do not involve the “assessment” or “collection” of any actual tax. However, neither the government nor the plaintiff in Snyder cited Direct Marketing in their briefs in the district court, and the district court opinion likewise did not cite Direct Marketing.

It is notable, however, that the plaintiffs’ brief did include a reference to the Wall Street Journal article reporting on the D.C. Circuit oral argument in the Z Street case, and their brief in fact included a copy of that article as an appendix. It is unfortunate that the plaintiffs apparently did not understand the full implications for their case of what was being discussed in that oral argument.

The Direct Marketing Case Takes a Different View than Prior Supreme Court Cases

These two decisions could be read as standing for the proposition that any suit that could, if successful, have an adverse impact on the collection of federal tax revenue is barred from being heard in district court by the AIA except through the mechanism of a tax refund suit. The Direct Marketing decision clearly rejected such a broad reading of the TIA, and this rejection should be equally applicable for the AIA.

The texts of the two provisions are very similar. The TIA provides in relevant part that “[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” The AIA provides in relevant part that, with a number of listed exceptions, “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.

The Court relied on the similarities between the AIA and the TIA in its interpretation of the TIA. In addition, the Court also relied on the historical relationship between the two provisions, noting that the AIA, which was enacted originally in 1867, was the model for the TIA, which was enacted in 1937.

The Court focused on the close relationship between the TIA and the Anti-Injunction Act to give a narrow, technical reading to the terms “assessment,” “collection,” and “restrain,” all of which appear in both the TIA and the Anti-Injunction Act. The Court relied on the fact that in the Internal Revenue Code, where the AIA is located, the terms “assessment” “levy” and “collection” have very narrow and precise technical meanings that “do not include informational notices or private reports of information relevant to tax liability.” While the TIA includes the term “levy” and the AIA does not, that should not result in any significant difference in interpretation for the terms that appear in both provisions.

As the Court noted,

the Federal Tax Code has long treated information gathering as a phase of tax administration procedure that occurs before assessment, levy, or collection. ‘Assessment’…refers to the official recording of a taxpayer’s liability, which occurs after information relevant to the calculation of that liability is reported to the taxing authority. Finally, ‘collection’ is the act of obtaining payment of taxes due. ‘[C]ollection’ is a separate step in the taxation process from assessment and the reporting on which assessment is based.

Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes….The TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.

The Tenth Circuit had relied on giving the term “restrain,” which appears in both the TIA and AIA, a broad meaning, basically, the sort of meaning that Bob Jones and “Americans United” might be read as giving to the AIA, namely, that “restrain” means any action that would have an adverse effect on the collection of tax revenue. The Court in Direct Marketing very clearly rejected that interpretation, in reasoning that is equally applicable to the AIA:

[A]s used in the TIA, “restrain” acts on a carefully selected list of technical terms—“assessment, levy, collection”—not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.”

Applying the correct definition, a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.

The fact that the Court in Direct Marketing interpreted terms in the TIA that appear in both the TIA and the AIA by reference to the precise meaning those terms have in the Internal Revenue Code should mean that in the context of the AIA, these precise meanings are if anything even more controlling. Thus, based on Direct Marketing, it seems very clear that the broad reading of the AIA that might be taken from Bob Jones and Americans United cannot be correct.

Impact on Other Cases: The Florida Bankers Case

Thus, for example, the Direct Marketing decision should be very relevant for the AIA issue in the Florida Bankers Association case, which is currently pending in the D.C. Circuit [Editor’s Note: for Les’ take last year in PT on the district court Florida Bankers case see APA and Challenges to Agency Guidance: Florida Bankers v US and More on Halbig v Sebelius; for Pat’s prior articles in Tax Notes on Florida Bankers see here and here.]. This case involves a challenge to regulations requiring banks to report to the IRS information relating to interest earned on accounts held by non-resident aliens, even though such persons are not subject to U.S. tax on that interest. At oral argument on February 13 of this year, one of the judges on the panel, Judge Kavanaugh, the author of the D.C. Circuit opinion in Loving, focused his questioning on the possible applicability of the AIA to bar this challenge. Direct Marketing should provide strong support for the conclusion that the AIA does not apply in that case.

However, one very significant respect in which the TIA and the AIA are not similar is in the way they phrase their limitations. The TIA phrases its limitation in terms of the power of the district court to act but the AIA does not. In a recent post in this blog, Carl Smith discussed a recent Tax Court decision that represented the first time the Tax Court has acknowledged the line of Supreme Court cases in recent years that have made it clear that the courts must be more precise and analytical in their determination as to when statutory limitations on the ability to maintain an action in court are “jurisdictional” and when they are not than had been the case before this line of Supreme Court authority.

Justice Clarence Thomas, in his opinion for the Court in Direct Marketing, repeatedly referred to the TIA as jurisdictional. For more on this point see Arkansas v. Arkansas Farm Credit Services. This classification mattered in this case because the state of Colorado had not raised the TIA as an issue in the district court and in fact had affirmatively stated that the TIA did not apply. If the TIA were not jurisdictional, this would mean the TIA was waived. However, jurisdictional limitations can be raised at any stage of litigation.

I have argued previously that the AIA is not jurisdictional, based in part on the difference in the way the limitations in the two provisions are phrased. However, this issue remains to be definitively resolved by the courts.