Kristin E. Hickman (Minnesota), CIC Services, LLC v. IRS: Another Blow to Tax Exceptionalism:
In 2011, in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court unanimously (with Justice Kagan abstaining) told the tax community that it was “not inclined to carve out an approach to administrative review good for tax law only,” thereby signaling to Treasury and the IRS that they ought to clean up their act respecting their compliance with general administrative law requirements, doctrines, and norms. Over the past ten years, the courts, the Government Accountability Office, and the Office of Information and Regulatory Affairs have slowly but surely prodded Treasury and the IRS in that direction. With its decision this week in CIC Services, LLC v. IRS, the Supreme Court has said to Treasury and the IRS — again unanimously — “yes, we really mean it.”
The CIC Services case concerned the scope of the Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a), and its implications for pre-enforcement judicial review of Treasury and IRS rules and regulations. Since its 1967 decision in Abbott Labs v. Gardner, the Court has interpreted the Administrative Procedure Act (APA) as adopting a presumption in favor of pre-enforcement judicial review of agency rules and regulations generally. By comparison, the AIA precludes lawsuits brought “for the purpose of restraining the assessment or collection of any tax” except as otherwise authorized by the Internal Revenue Code. The effect of the provision generally is to defer judicial review of tax cases to post-enforcement refund and deficiency actions, and thus to require individuals or entities seeking to challenge the validity of a Treasury or IRS rule or regulation to “pay the tax and seek a refund."
In this case, CIC Services brought a pre-enforcement lawsuit challenging the validity of IRS Notice 2016-66, claiming that the Notice violated the APA for its lack of notice-and-comment rulemaking procedures and reasoned decisionmaking. ... A divided Sixth Circuit had held that the AIA precluded judicial review of CIC Services’ APA claim. ...
Writing for the Court, Justice Kagan crafted a very careful opinion that avoided grand pronouncements and instead emphasized the facts and circumstances of the particular third-party reporting requirements at stake in that case. At the same time, however, Justice Kagan managed to avoid putting the Court in too tight of a box with respect to future cases, and she drew lines and sent signals that could allow a future Court the flexibility to expand the range of Treasury and IRS rules and regulations eligible for pre-enforcement judicial review without running afoul of the CIC Services decision. ...
The litigation over the validity of IRS Notice 2016-66 is not over. The case merely returns to federal district court for consideration of the merits of CIC Services’ APA claims. Meanwhile, the Court’s decision in CIC Services almost certainly will lead to additional pre-enforcement challenges to Treasury and IRS rules and regulations under the APA, and further judicial scrutiny of Treasury and IRS administrative practices. Proponents of tax exceptionalism undoubtedly will try to limit the reach of the CIC Services decision to third-party information reporting requirements, or tax advisers, or instances in which criminal prosecution has been threatened. Justice Kagan’s opinion imposes none of those limitations expressly and additionally contains several hints that the Court may favor narrowing the AIA further to permit pre-enforcement judicial review of a broader array of Treasury and IRS rules and regulations under the APA. Regardless, the trend against tax exceptionalism continues — decisively!