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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