We welcome back Marilyn Ames who has blogged for us several times in the past. She graciously agreed to write about some recent litigation that highlights the confusion currently surrounding these provisions. Keith
In the past few weeks, I have been revising the subchapter in Saltzman and Book, IRS Tax Practice and Procedure on the Anti-Injunction Act. It has been an exercise in frustration, as, although the Supreme Court says it likes “rule[s] favoring clear boundaries in the interpretation of jurisdiction statutes,” it doesn’t necessary mean what it says. That’s a quote from Direct Marketing Association v. Brohl, 135 S. Ct. 1124, 1131 (2015), discussing the lesser known sibling of the AIA, the Tax Injunction Act, which is aimed at preventing federal courts from hearing suits intended to restrain the assessment, levy, and collection of state taxes. And in the midst of this attempt to make some sort of order out of something which does not have any, two district courts have added their opinions to the fray.
In State of New York, et al. v. Mnuchin, which can be found here, the Southern District of New York takes on the issue of whether the Anti-Injunction Act prevents four states from bringing suit to litigate the constitutionality of the $10,000 ceiling placed on the deduction of state and local taxes (SALT) by the 2017 Tax Cuts and Jobs Act. The federal government raised three challenges to the Court’s subject matter jurisdiction, including the limitation imposed by the Anti-Injunction Act (AIA). The AIA, located at 26 USC § 7421(a) provides, with numerous exceptions, that “no 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.” (For those of you interested in historical/legal trivia, the initial iteration of the AIA was passed in 1867.) In addition to the exceptions to the AIA actually contained in the statute, the Supreme Court created a judicial exception to the AIA in Enochs v. Williams Packing & Navigation Co.,370 U.S. 1 (1962), requiring the plaintiff to meet a two-part test to overcome the bar of the AIA: (1) it is clear at the time the suit is filed that under no circumstances could the government prevail on the merits; and (2) the action at issue will cause the plaintiff irreparable injury. And with this opinion, the race began to explore the boundaries of this court-made exception.
One of these cases, and the one relied on by the court in State of New York v. Mnuchin, is South Carolina v. Regan,465 US 367 (1984). In Regan, South Carolina invoked the Supreme Court’s original jurisdiction and asked leave to file a complaint against Donald Regan, the Secretary of the Treasury at the time to litigate whether a provision of TEFRA was unconstitutional. The provision in question required state obligations to be issued in registered rather than bearer form in order to qualify as tax exempt under IRC § 103. The government raised the AIA in its objection to South Carolina’s motion, arguing that the state did not fall within any of the specific exceptions or within the judicial exception created in Williams Packing. The Supreme Court then created an exception to its exception, holding that the AIA was not intended to bar a suit when Congress has not provided the plaintiff with an alternative legal way to challenge the validity of a tax. Because South Carolina was not liable for a tax which it could then pay and use as the basis for a refund suit, it had no other way to litigate the constitutionality of the TEFRA provision. In this situation, the Supreme Court said “a careful reading of Williams Packing and its progeny supports our conclusion that the [AIA] was not intended to apply in the absence of such a remedy.”
In State of New York v. Mnuchin, four states that impose lots of state and local taxes sued to have the $10,000 ceiling on the deduction of SALT declared unconstitutional. The federal government argued that the suit was barred by the AIA and that the Williams Packing exception did not apply. This is not like South Carolina v. Regan, the federal government argued, because the taxpayers affected in these four states have a motivation to file refund actions to challenge the law. (It’s not clear from the opinion why the federal government felt that the bond holders in Regan who bought bonds that no longer qualified as tax exempt would not have a similar motivation.) The district court rejected the federal government’s argument, and noted that in both Regan and the suit before the court, the plaintiff-states were seeking to protect their own interests, rather than those of their taxpayers. In this situation, the court in State of New York v. Mnuchin held, a state has no other legal remedy to assert its sovereign interests. When a plaintiff has no other legal remedy to litigate the issue, then the AIA does not apply even if the plaintiff cannot meet the Williams Packing test. Having won the jurisdictional battle, the states in New York v. Mnuchin then lost the war when the district court held that the ceiling on SALT deductions is constitutional. Lots for everyone to argue about on appeal.
The second opinion of American Trucking Associations, Inc. v. Alviti, 377 F.Supp.3d 125 (D.R.I. 2019)involves the Tax Injunction Act, 28 USC § 1341, which provides “the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” As the Supreme Court recognized in Williams Packing, the TIA “throws light on the proper construction to be given” to the AIA. In other words, these statutes have similar language and purpose. In the Alviti case, which can be found here, the plaintiffs are long distance trucking companies and associations that filed suit against the state of Rhode Island challenging the constitutionality of a bridge toll scheme. The statute, known as the “Rhodeworks” Act, expressly prohibits the imposition of the bridge toll on any vehicles other than large commercial trucks. Under the Rhodeworks Act, the toll is set by state agencies in terms of the amount and the locations where it will be collected, and the funds go into a special account to be used only for the replacement, rehabilitation, and maintenance of bridges. The scheme instituted sets maximum daily amounts that can be collected based on the routes traveled, which the plaintiffs argue falls more heavily on trucks involved in interstate rather than intrastate travel.
The state of Rhode Island raised the TIA as a defense to the suit, arguing that although the fees were labelled as tolls, they were actually taxes subject to the TIA. Although the Supreme Court has indicated it prefers clear boundaries, the district court framed the issue as one “which pits the actual language of the TIA and the context surrounding its enactment in the 1930s against several more modern decisions of the First Circuit that attempt to distinguish between fees and taxes.” In other words, let’s make this more confusing. The district court then cited a number of cases decided prior to enactment of the TIA, including one decided by the Supreme Court in 1887, that a toll is not a tax and that they are distinct and serve different purposes. Despite these decisions, the court then discussed whether the exaction in question fell within the three-pronged test of San Juan Cellular Telephone Co. v. Pub. Serv. Comm’n of P.R., 967 F.2d 683 (1st Cir. 1992), the purpose of which is to decide if a challenged assessment is more like a tax or a regulatory fee. Despite finding that two of the three prongs were more in the nature of a fee, the court relied on the final prong of the test to decide the bridge tolls were actually taxes, and the suit was thus barred by the TIA. The case has been appealed to the First Circuit, and as the trucking company plaintiffs note in the brief to the circuit, this is the first case involving an exaction labelled a toll that has been found to be a tax.
It seems that while the mirage of clear boundaries for the AIA and the TIA is out there, the courts have difficulties in making their way to it. I am reminded of a scene from Monty Python and the Holy Grail – “Bring me a shrubbery.” “Not THAT shrubbery.”
And we go on trying to make sense of what the courts really want.