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On May 17, 2021, in CIC Services LLC v. Internal
Revenue Service, a unanimous U.S. Supreme Court held that the
Anti-Injunction Act (AIA) does not bar an action challenging the
validity of a notice issued by the IRS that imposed information
reporting requirements and which sought to enforce the requirements
through the imposition of tax penalties. The Court reversed a Sixth
Circuit decision that had applied longstanding Supreme Court
precedent barring, with only a few exceptions, suits seeking
injunctive relief against the Treasury Department and IRS. The
Court reasoned that the action could proceed because it should be
viewed as seeking to enjoin an information reporting requirement
and not the collection of the tax penalty that could be imposed for
non-compliance.
The Supreme Court clarified several years ago that
administrative law principles generally apply with equal force to
federal tax law. Accordingly, many observers anticipated that the
Court would take the occasion to clarify when pre-enforcement suits
can be brought to challenge the validity of Treasury regulations
and IRS published guidance, as the principles of administrative law
are in some ways in tension with the AIA. Pre-enforcement
challenges under the Administrative Procedure Act (APA) are common
in other administrative law contexts; but the AIA has been
interpreted historically to limit the availability of such
challenges in tax matters. Hence, many observers expected the Court
in CIC Services to narrow its interpretation of
the AIA in a manner that would allow more pre-enforcement
challenges and bring the tax law more into line with administrative
law, which is precisely what the Court has done.
At the same time, while CIC
Services represents a significant victory for the
financial advisory firm that brought the suit (and similarly
situated advisory firms), the Supreme Court’s reasoning leaves
important issues unaddressed. While it does make clear that certain
types of pre-enforcement challenges to tax regulations can survive
the AIA, it does not fully address the interplay between the
provision for pre-enforcement judicial review of agency action
under the APA with the bar to injunctive relief in certain types of
tax cases under the AIA, ensuring that further litigation will
follow.
Background
In Notice 2016-66, the IRS identified certain so-called
“micro-captive” insurance arrangements as potentially
abusive and, therefore, subject to reporting under the
“reportable transaction”
regime.1 Pursuant to that regime, Notice 2016-66
requires a taxpayer’s “material advisors”—i.e.,
entities that earned income from providing the taxpayers with
“aid, assistance, or advice” with respect to such a
transaction—to file disclosure statements describing the
transactions in detail.2 A failure to supply
information regarding a reportable transaction can result in the
imposition of a $50,000 civil penalty on the material
advisor.3 In addition, a material advisor who does
not furnish, on request, a list of all the taxpayers it advised on
a reportable transaction can incur a penalty at the rate of $10,000
per day.4 Both of these penalties are deemed
“taxes” for purposes of the Internal Revenue
Code—including the AIA.5 Moreover, in
addition to these civil penalties, the willful breach of the
information reporting requirements is a criminal misdemeanor,
punishable by fines and up to one year in prison.6
CIC Services provided services to taxpayers engaging in
micro-captive transactions which made it a material advisor under
the reportable transaction regime. While complying with the
regime’s reporting requirements (and thus without incurring any
penalties), CIC Services brought suit in U.S. district court
challenging the validity of Notice 2016-66 on two grounds. First,
CIC Services asserted that the IRS, in issuing the notice, had
failed to provide an opportunity for notice and public comment and,
thus, had violated the APA. Second, CIC Services alleged that the
notice is arbitrary and capricious under the APA because it imposed
new reporting obligations without any proven need. As relief, CIC
Services sought a court order setting aside the notice and
enjoining its enforcement as an unlawful rule.
In the district court, the government filed a motion to dismiss
based on the AIA. The government argued that the relief requested
would prevent the IRS from assessing a tax penalty against material
advisors that disregard the notice’s reporting requirements in
violation of the AIA, which provides that “no suit for the
purpose of restraining the assessment or collection of any tax
shall be maintained in any court by any
person.”7 The government argued that CIC
Service’s suit fell within the terms of the AIA and did not
satisfy the requirements of any judicially created exceptions to
the AIA. The district court agreed with the government and
dismissed the action.8
On appeal, the Sixth Circuit affirmed in a 2-1
decision.9 According to the majority, the relevant
question under the Supreme Court’s decisions in Bob
Jones University and Alexander v. “Americans United”,
Inc., was whether the relief sought would “necessarily
preclude” the collection of taxes within the meaning of the
AIA.10 The Sixth Circuit majority held that CIC
Service’s suit violated the AIA because an invalidation of the
notice would “necessarily” invalidate penalties that are
deemed taxes.11 The dissent disagreed, concluding
that “a suit to enjoin a reporting requirement is not” a
suit to restrain the collection of tax.12 A
petition for rehearing en banc was denied over a
dissent signed by seven judges.
Supreme Court Opinion
Justice Kagan’s Opinion for the Court
In an opinion written by Justice Kagan, the Supreme Court held
that the AIA did not bar the injunctive relief sought by CIC
Services, stating: “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.”13 The
Court found so even though the information reporting requirement
imposed on CIC Services was designed to “help the IRS bring in
future tax revenues—here, by identifying sham insurance
transactions.”14
The Supreme Court relied in substantial part on its relatively
recent decision in Direct Marketing Assn. v. Brohl,
which allowed out-of-state retailers to seek injunctive relief
preventing enforcement of a Colorado requirement that such
retailers report sales to state
residents.15 Similar to the AIA, the Tax Inunction
Act bars suits brought in federal court to restrain the
“assessment, levy and collection” of state taxes, and the
two statutes have historically been interpreted in the same manner.
The Court acknowledged that Direct Marketing did
not involve an information reporting requirement backed up by a
statutory penalty deemed a “tax.” Nevertheless, the Court
found that, as in Direct Marketing, the purpose of
the lawsuit was the decisive factor. In this regard, the Court
viewed CIC Services, like the out-of-state retailers
in Direct Marketing, as seeking injunctive relief
from a reporting mandate, not a tax.16 The Court
deliberately directed its attention to the face of CIC
Service’s complaint rather than its subjective purpose in
bringing the suit.17
The Court rejected the government’s argument that an
injunction against a notice is the same as an injunction against
the tax penalty.18 Three aspects of the reportable
transaction regime refute this notion, according to the Court.
First, the reporting required under Notice 2016-66 inflicts
substantial compliance costs separate and apart from the statutory
tax penalty that in many instances would exceed the tax penalties
for a violation. Second, there are several steps between the
upstream reporting requirement and the downstream tax penalty,
which Justice Kagan likened to a “long river.” Third, the
violation of the notice is punishable not only by a civil penalty,
but also by separate criminal penalties.19
Lastly, the Court did not accept the government’s argument
that allowing CIC Services to proceed would open the
“floodgates” for a “wave” of suits seeking
pre-enforcement injunctive relief from regulatory action. The Court
observed that the present suit “contests, and seeks relief
from, a separate legal mandate,” whereas the type of case
contemplated by the government’s floodgates argument involves
“a conflict over taxes, whether on earning income, or selling
stock, or entering into a business
transaction.”20 The Court also clarified that
its holding does not reflect a return to previously abandoned case
law that differentiated between regulatory taxes and
revenue-raising taxes and allowed pre-enforcement challenges to be
brought against the former. The AIA, the Court observed,
“draws no distinction between regulatory and revenue raising
tax rules.”21
Concurrences by Justice Sotomayor and Justice Kavanagh
Two justices wrote brief concurrences. Justice Sotomayor wrote
separately to highlight that the answer to the question of whether
the AIA bars injunctive relief “might be different if CIC
Services were a taxpayer instead of a tax
advisor.”22 In particular, she noted that
taxpayers who have similar reporting requirements to those of a
material advisor face a choice between providing information that
may be used by the IRS and refusing to provide such information and
paying a noncompliance penalty. She expressed doubt as to whether a
taxpayer could challenge an information reporting requirement and
be viewed as not seeking to restrain the collection of
tax.23
Justice Kavanagh wrote separately to underscore his view of the
impact of the decision on Alexander v. “Americans
United” Inc.24 and Bob Jones
University v. Simon,25 the cases relied upon
by the Sixth Circuit. In this regard, he noted, the Court held that
“if a pre-enforcement suit would ‘necessarily
preclude’ the assessment or collection of a tax, that suit is
barred by the Act and the taxpayer needs to bring a refund suit
after paying the tax.”26 In his view, the
“sweeping language” of those cases, which has been
repeatedly invoked by lower courts in dismissing pre-enforcement
challenges, “instruct(s) courts to look at the effects of a
suit” rather than the purposes of the
suit.27 He observed that the Sixth Circuit’s
decision in CIC Services was consistent with the
broad prohibition on pre-enforcement challenges. In reversing the
Sixth Circuit, he noted, the Court was in effect carving out a new
exception for “pre-enforcement suits challenging regulations
backed by tax penalties.”28 He appeared to
view this as a positive development in that “the broad
‘effects’ rule articulated in those decisions is hard to
square with the text of the (AIA), which bars only a
pre-enforcement ‘suit for the purpose of restraining the
assessment or collection of tax.'”29
Analysis
The Supreme Court’s decision in CIC
Services is as interesting for what it did not address as
what it addressed. This is true in at least two respects. First,
while the Court relied on Direct Marketing for
its analysis of the purpose of CIC Service’s complaint, the
Court did not embrace the in-depth textual and historical analysis
of the terms “assessment” and “collection”
reflected in the reasoning of that case. In Direct
Marketing, the Court concluded that those terms refer to
discrete phases that occur after the information gathering phases
of the taxation administration process.30 The Court
drew no such clear distinction here.
After Direct Marketing, many observers expected
that the Court would eventually apply a similar analysis to the
language in the AIA. Indeed, in a closely followed case brought by
the U.S. Chamber of Commerce in 2017 challenging an
“anti-inversion” temporary Treasury regulation, a U.S.
district court applied the reasoning of Direct
Marketing in holding that the suit was not barred by the
AIA. The district court concluded that the Chamber of
Commerce’s suit was not seeking to restrain the assessment or
collection of tax, but instead sought to challenge the validity of
a rule so its members could decide whether to engage in future
transactions that would be affected by the
regulation.31
But the Court in CIC Services did not apply
the same reasoning concerning the meaning of the terms
“assessment” and “collection” that it applied
in Direct Marketing. Instead, the Court articulated a narrower
holding that focused on CIC Service’s purpose in challenging
the substantive and procedural validity of the information
reporting mandate imposed by Notice 2016-66 as distinct from a
particular tax. Justice Sotomayor’s concurrence appears aimed,
at least in part, at signaling that the Court’s opinion should
not be read as a broad endorsement of pre-enforcement challenges to
Treasury regulations or other IRS guidance. Justice Kavanagh’s
concurrence also confirms the narrowness of the opinion in
characterizing it as merely carving out an exception
to Americans United and Bob Jones
University, though he seems to contemplate the possibility of
a future judicial reappraisal of the AIA’s text consistent
with Direct Marketing.
Second, in addition to not examining the full implications
of Direct Marketing, the Court implicitly declined to
address two other elephants in the room—namely, the role of
the APA in the review of Treasury regulations and other IRS
guidance and the related notion of “tax exceptionalism.”
APA provides that “(a) person suffering legal wrong because of
agency action . . . is entitled to judicial review
thereof.”32 Outside the tax arena, immediate
challenges to regulatory guidance is the norm under the APA (and
many administrative law statutes). Indeed, the Supreme Court has
held that affected parties generally “need not await
enforcement proceedings before challenging final agency action
(under the APA) where such proceedings carry the risk of serious
criminal and civil penalties” absent a showing of clear and
convincing evidence of contrary congressional
intent.33 Not only did CIC Services make this point
on brief and at oral argument, but the dissenting Sixth Circuit
judge and several amicus curiae did as well.
Despite the extensive airing of this issue, the Court did not
make any explicit attempt to harmonize the provision for
pre-enforcement review under the APA with the bar to injunctive
relief under the AIA. This silence seems to run contrary to the
Court’s pronouncement in Mayo Found. for Med. Educ.
& Research v. United States, that “(i)n the absence
of (special) justification, we are not inclined to carve out an
approach to administrative review good for tax law
only.”34 While the text of the AIA certainly
indicates that some justification exists for an exception to APA
review relating to the “assessment” and
“collection” of tax, the question is what is the extent
of the carveout of APA review. In light of Direct
Marketing, it seems reasonable to say that any carveout to
pre-enforcement challenges under the APA should be limited to the
“assessment” and “collection” phases of tax
administration relating to a particular taxpayer. Apparently, the
Court concluded that such a detailed discussion of the AIA and its
relationship to the APA would best be postponed for another
day.
Conclusion
Although the Supreme Court did not take up the challenge of
reconciling the AIA and the APA, it did not foreclose the
possibility that it might do so in the future. In the meantime,
lower courts will likely be forced to wrestle with these important
yet unresolved issues as taxpayers and other affected parties
continue to bring challenges to the validity of Treasury
regulations and IRS published guidance.
Footnotes
1 Notice 2016-66, 2016–47 C. B. 745.
2 Id. at 748.
3 IRC §§ 6707(b)).
4 IRC §§ 6708(a), 6112(a).
5 IRC § 6671(a).
6 IRC § 7203.
7 IRC § 7421(a).
8 CIC Services LLC v. Internal Revenue Service,
2017 WL 5015510 (E.D. Tenn., Nov. 2, 2017).
9 CIC Services LLC v. Internal Revenue Service,
925 F. 3d 247 (6th Cir. 2019).
10 Id. at 253 (quoting and
citing Bob Jones Univ. v. Simon, 416 U.S. 725 (1974)
and Alexander v. “Americans United”, Inc.,
416 U.S. 752 (1974)).
11 Id. at 258. The majority relied heavily
upon then-Judge Kavanagh’s opinion in Fla. Bankers
Ass’n v. U.S. Dep’t of Treasury, 799 F.3d 1065 (D.C.
Cir. 2015). See infra n.27.
12 Id. at 259–60 (Nalbandian, J.,
dissenting) (emphasis in original).
13 Slip Op. at 6.
14 Id.
15 Direct Marketing Assn. v. Brohl, 575 U.S. 1
(2015). As the Court observed, at issue in Direct
Marketing was the scope of the Tax Injunction Act, which
bars injunctive relief with respect to state tax collection and
which is modeled on the AIA. Slip Op. at 6 n.1.
16 Slip Op. 7–8.
17 Id. at 7.
18 Id. at 9.
19 Id. at 10–13.
20 Id. at 13–14.
21 Id. at 15.
22 Id. at 1 (Sotomayor, J.,
concurring).
23 Id.
24 416 U.S. 752 (1974).
25 416 U.S. 725 (1974).
26 Id. at 1 (Kavanagh, J.,
concurring).
27 Id. While sitting on the D.C. Circuit,
then Judge Kavanagh wrote the opinion in one such case, which was
decided 2-1 and issued shortly after the Supreme Court’s
decision in Direct Marketing. See Fla.
Bankers Ass’n v. U.S. Dep’t of Treasury, 799 F.3d 1065
(D.C. Cir. 2015). The dissenting judge expressed the view that the
reasoning in Direct Marketing with regard to
the meaning of “assessment” and “collection”
should be applied to the AIA. See id. at
1072–76 (Henderson, J., dissenting).
28 Id. at 2.
29 Id.
30 Direct Mktg., 575 U.S. at 8–10.
31 Chamber of Commerce of the U.S. v. Internal
Revenue Service, No. 1:16-CV-944-LY, 2017 WL 4682050 (W.D.
Tex. Oct. 6, 2017) (“Here, Plaintiffs do not seek to restrain
assessment or collection of a tax against or from them or one of
their members. Rather, Plaintiffs challenge the validity of the
Rule so that a reasoned decision can be made about whether to
engage in a potential future transaction that would subject them to
taxation under the Rule.”), appeal dismissed,
No. 17-51063, 2018 WL 3946143 (5th Cir. July 26, 2018).
32 5 U.S.C. 702.
33 U.S. Army Corps of Eng’rs v. Hawkes Co.,
136 S. Ct. 1807, 1815 (2016) (quotations omitted); see
also Abbott Labs. v. Gardner, 387 U.S. 136, 14–41, 153
(1967).
34 Mayo Found. for Med. Educ. & Research v.
United States, 562 U.S. 44, 55 (2011).
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