TaxProf Blog op-ed: Misapplication Of The Anti-Injunction Act In Chamber Of Commerce v. IRS, by Bryan Camp (Texas Tech):
This is a follow-up to some good blogs on a recent decision by the District Court for the Western District of Texas in Chamber of Commerce v. IRS. See these posts by Professors Les Book, Kristin Hickman, Daniel Hemel and Andy Grewal. All are worth reading.
The more I think about this opinion, the more convinced I am that the court misapplied the Anti-Injunction Act. What I want to point out in this post is what I see as a logical disconnect between the court’s ruling on standing and its ruling on the Anti-Injunction Act. My contention is that the court’s rationale for finding standing necessarily poisons the plaintiffs’ ability to avoid the Anti-Injunction Act. In brief, I just don’t think the plaintiffs here can have it both ways. If they have standing because the disliked regulation will hurt them by potentially increasing their taxes, the Anti-Injunction Act applies. But if, in order to avoid §7421, they claim that striking down the disliked regulation will have no effect on the assessment or collection of taxes from them (or anyone else) then they lose standing.
Anti-Injunction Act is found at 26 U.S.C. §7421 and 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, whether or not such person is the person against whom such tax was assessed.” The district court in Chamber of Commerce held the statute did not apply to the case before it.
The substantive beef in the case is about a regulation implementing IRC §7874. That statute limits tax benefits to certain U.S. companies who want to re-incorporate as foreign companies. Section §7874(g) authorizes Treasury to write regulations “as are necessary to carry out this section, including regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section.” Treasury did so in the form of a Temp. Reg. that was simultaneously issued as a Proposed Reg. Members of each of the two plaintiff organizations (the Chamber of Commerce and the Texas Association of Business) dislike the regulatory action embodied in the Temp. Reg.
Rather than suing themselves, however, the members of these organizations caused their umbrella organizations to sue. The plaintiffs wanted the court to enjoin enforcement of the disliked regulatory action.
The government raised both standing and the Anti-Injunction Act as bars to the suit. The Court first found that the associations had standing because some of their members would be hurt by the rule. The Court gives this example of a member who called off a merger because of the regulation:
Allergan is a member of the Chamber and the Greater Waco Chamber of Commerce, which is a member of Texas Association of Business. Plaintiffs assert that the Rule eliminated tax benefits associated with a proposed merger contemplated by Allergan that was announced in November 2015. At the time the merger was proposed, the corporate composition of Allergan was the product of several acquisitions of United States corporations by a foreign corporation over the previous three years. As a result of the previous acquisitions, the entity that would have resulted from the proposed merger would have been categorized as a United States corporation due to application of the Rule and thus would have been subject to United States federal income tax. Before promulgation of the Rule, the entity would not have been subject to the tax.
In other words, the disliked regulation was disliked precisely because it eliminated tax benefits that Allergan thought it would otherwise get in a proposed transaction. That was a sufficient harm. The court concluded its standing analysis this way: “Allergen...identified a specific transaction that was thwarted by the Rule and asserted that it would actively pursue other inversions if this court were to set aside the challenged Rule.”
Next, the court held that the Anti-Injunction Act did not bar the suit. The court says “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.”
If I am reading the court correctly, it is holding that §7421 only applies when a particular taxpayer seeks to contest an already assessed tax but not when a taxpayer, or someone other than the taxpayer potentially affected (hence, Allergen using the cover of the Chamber of Commerce) seeks to prevent the implementation of a regulation that would subject it to increased tax on possible future transactions.
That holding runs smack-dab against the teachings of the Supreme Court on how to apply the Anti-Injunction Act. Since at least Bob Jones Univ. v. Simon, 416 U.S. 725 (1974) the Court has been consistent in finding that §7421 bars suits that attempt to restrain future assessments. In the Bob Jones case, for example, the Court framed the question presented as “whether, prior to the assessment and collection of any tax, a court may enjoin the Service from revoking a ruling letter declaring that petitioner qualifies for tax-exempt status.” The Court said no, §7421 prevents not only a taxpayer directly affected by the agency action from seeking such an injunction but also prevents anyone else from doing so.
The Chamber of Commerce case is well within the scope of the Bob Jones precedent. In fact, it presents an even easier case for application of §7421. In Bob Jones, the taxpayer seeking to enjoin the disliked action of the IRS argued that the action would not affect it’s taxes but only the taxes of donors who would no longer be able to deduct their contributions. Focusing on the phrases “for the purpose of” and “by any person” the Court found that indirect effect was enough to trigger the §7421 prohibition.
Another precedent that seems pretty squarely against this district court’s interpretation is one from the D.C. Circuit. In Florida Bankers Ass'n v. U.S., 799 F.3d 1065 (D.C. Cir. 2015), an association of banks attacked regulations requiring them to report interest paid to certain foreign account-holders. See Treas. Reg. 1.6049–4, 1.6049–8. The regulation certainly did not affect their own tax liabilities. However, the banks would potentially be liable for §6721 penalties if they failed to obey the regulation.
Like the Chamber of Commerce plaintiffs, the Florida Bankers Ass’n argued that they were not seeking to directly enjoin any particular tax already assessed against them. Rather, they were attacking the regulatory aspects of the regulation---it was “forcing” their members to behave in a way they did not want to behave, to issue information returns when they did not want to do that.
The D.C. Circuit rejected the “we just attacking the regulatory aspect of the regulation” argument. It said held that a the Anti–Injunction Act applied “even if the plaintiff claims to be targeting the regulatory aspect of the regulatory tax. That is because invalidating the regulation would directly prevent collection of the tax, in violation of the Anti–Injunction Act.” (internal quotes and citations omitted).
The Florida Bankers Association threw up another argument: the disliked regulation would not affect the collection or assessment of their members' taxes. Members might get hit with a penalty but that was not a “tax.” If the D.C. Circuit accepted this argument, it would need to fall back on the Bob Jones rationale that the disliked regulation would still affect the taxes of other taxpayers.
But the D.C. Circuit did not go that direction. Instead it said that the penalty was a “tax” for purposes of the §7421 prohibition: “Here, because the Code defines the penalty as a tax, a tax is imposed as a direct consequence of violating the regulation. Invalidating the regulation would directly bar collection of that tax. This case is therefore at the heartland of the Anti–Injunction Act.” 799 F.ed at 1070-71 (emphasis supplied).
The Chamber of Commerce plaintiffs seem to be in an even weaker position to avoid §7421 than were the Florida Bankers Association plaintiffs because here the disliked regulation will directly affect the potential tax liabilities of the members themselves and not third parties. It will directly affect them because that is why they have standing in the first place!
Now it is true that there is a long-standing general administrative law principal that permits pre-enforcement attacks on agency regulations. See e.g. Abbott Laboratories v. Gardner, 387 U.S. 136 (1967). Generally, agencies cannot raise the argument that someone affected by a final regulation must wait until they are penalized or otherwise forced to defend an alleged violation of the regulation in order to contest the regulation’s validity.
That general administrative law rule does not apply to tax administration. That's because tax is indeed "exceptional." <grin>. Well, at least Congress thinks so. It enacted §7421 after all. And that statute forces taxpayers who dislike a regulation to indeed battle that regulation in the context of contesting their tax liabilities. Taxes are not punishment. They are taxes. As the D.C. Circuit emphasized in the Florida Bankers case: “To be clear, our ruling does not prevent a bank from obtaining judicial review of the challenged regulation. A bank may decline to submit a required report, pay the penalty, and then sue for a refund. At that time, a court may consider the legality of the regulation. The issue here is when – not if – the bank may challenge the regulation.”
Similarly, the members of the Chamber of Commerce can attack the disliked regulation should it become an issue in a substantive dispute between them and the IRS. Until then, the Anti-Injunction Act tells both them and their organization to leave it alone.