Paul L. Caron

Friday, September 18, 2020

Tax Profs On Both Sides In Case Pending in Supreme Court: CIC Services v. IRS

Currently before the Supreme Court is a case called CIC Services v. IRS. It involves the question of whether §7421 — Commonly called the Anti-Injunction Act (“AIA”) — prevents CIC from suing the IRS over the propriety of Notice 2016-66. That Notice declares certain micro-captive insurance arrangements as “transactions of interest.” It triggers certain reporting requirements for both CIC (as a material advisor) and CIC clients who have engaged in the arrangements described in the Notice. CIC asserts the Notice was illegally issued.

CIC (and another entity who has since dropped out) sued in federal district court, asking the court to (1) declare Notice 2016-66 invalid and (2) permanently enjoin the Service from enforcing the Notice. The district court dismissed the suit as barred by both the AIA and the Declaratory Judgment Act (DJA), 28 U.S.C. §2201(a). The AIA says 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 DJA permits suits for declaratory judgements except for suits “with respect to Federal taxes....”

A split Sixth Circuit panel affirmed. A closely divided Sixth Circuit then denied CIC’s petition for rehearing en banc. How closely divided? Six judges thought the rehearing petition should be denied. Six dissenting judges thought it should be granted. One judge said he thought the dissenters had the better of the argument but he was going to vote to deny because of circuit precedent. He expressed the hope that the Supreme Court would take the case. And, guess what? The Supreme Court took the case.

A summary of the Parties' argument and the Tax Prof briefs comes below the fold

CIC says its suit is not prohibited by either the AIA or the DJA. It says that it did not file suit for the “purpose” of restraining any tax, even though the suit might have some downstream “effect” of preventing future assessments of some taxpayers. The suit simply seeks to restrain the collection of information. CIC points out that the Supreme Court, in a case called Direct Marketing Ass’n v. Brohl, 575 U.S. 1 (2015), held that a very similar statute did not bar a very similar suit. The similar statute was the Tax Injunction Act (“TIA”), 28 U.S.C. §1341, which says a federal court cannot "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."  The similar suit was a suit to restrain an information reporting requirement. The Court read the TIA narrowly to find that restraining collection of information was not the same as restraining collection of taxes.

The government counters with the Sixth Circuit’s analysis: Notice 2016-66 is enforced by an assessable penalty in §6707. Section 6671 says that any reference to the word “tax” in the Tax Code includes assessable penalties. Hence, the suit seeks to restrain assessment of the “tax” that would be assessed against folks who failed to obey the reporting requirements triggered by Notice 2016-66, including CIC. The government says Direct Marketing is not applicable.  Different statute, different suit, dontcha know.

Eleven amici filed briefs supporting CIC. Two amici filed briefs supporting the government. Tax Profs were on both sides.

Tax Profs wrote two of the Briefs supporting CIC. First, Professor Kristin Hickman (Minnesota) submitted a brief arguing that: (1) the history of the AIA supports CIC; (2) Direct Marketing supports CIC; and (3) allowing the AIA to control the outcome in this case would run counter to important principles of administrative law contained in, and enforced through, the Administrative Procedure Act (APA).

Second, Professors Keith Fogg (Harvard) and Les Book (Villanova) authored a brief on behalf of the Center for Taxpayer Rights, arguing that: (1) the history of the AIA supports CIC; (2) Direct Marketing supports CIC; and (3) allowing the AIA to control the outcome in this case would hurt low income taxpayers because it would give the IRS “the unilateral right to shield their rule-making from APA scrutiny by choosing to include the right to impose a potential penalty for noncompliance.” Brief at 3.

Tax Profs also wrote the two briefs supporting the government. First, yours truly filed a brief arguing that (1) the history of the AIA supports the government, (2) a suit to restrain information collection necessarily restrains assessment and collection of taxes; and (3) Direct Marketing does not apply.

Second, Professors Daniel Hemel (Chicago), Susan Morse (U. Texas), and Clinton Wallace (S. Carolina) authored a brief on behalf of former government officials. It argues that (1) CIC was promoting tax shelters; (2) the information sought was vital to detecting and shutting down this particular tax shelter; and (3) allowing CIC to maintain the suit would cripple the government’s ability to fight tax shelters in general and this tax shelter in particular.

The Supreme Court has scheduled oral arguments for December 1, 2020.

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