On May 17, 2021, the Supreme Court issued its unanimous decision in CIC Services, LLC v. Internal Revenue Services, a case involving the Anti-Injunction Act and tax penalties. Justice Kagan delivered the opinion for the Court and Justices Sotomayor and Kavanaugh filed concurring opinions.
Joining us to discuss the decision and its implications are several experts in the field.
- Susan C. Morse, Angus G. Wynne, Sr. Professor in Civil Jurisprudence, University of Texas at Austin School of Law
- Kristin E. Hickman, Distinguished McKnight University Professor and Harlan Albert Rogers Professor in Law, University of Minnesota Law School
- Moderator: Robert T. Carney, Senior Counsel, Caplin & Drysdale; Adjunct Professor, Georgetown University Law Center
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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of Practice Group Teleforum calls, become a Federalist Society member today at fedsoc.org.
Evelyn Hildebrand: Welcome to The Federalist Society's virtual event. This afternoon, May 25, we discuss the Supreme Court's decision in CIC Services LLC v. Internal Revenue Service.
My name is Evelyn Hildebrand, and I'm an Associate Director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call.
Today, we are fortunate to have with us a very distinguished panel. Professor Susan C. Morse is the Angus G. Wynne Senior Professor of Law at the University of Texas at Austin School of Law. And she's joined by Professor Kristin E. Hickman, the McKnight Presidential Professor in Law at the University of Minnesota Law School. Professor Hickman is also an Executive Committee Member of The Federalist Society's Administrative Law and Regulation Practice Group.
Our Moderator this afternoon is Professor Robert T. Carney. Professor Carney is Senior Counsel at Caplin & Drysdale, an Adjunct Professor at Georgetown University Law Center, and he's also a member of our Administrative Law and Regulation Practice Group. We're very pleased to welcome this distinguished panel to discuss today's decision.
After our speakers give their opening remarks, we will turn to you, the audience, for questions. So be thinking of those as we go along and have them in mind for that portion of the event. If you do have a question, please enter it in either the Q&A or the chat function at the bottom of your screen, and we will answer those questions as possible towards the end of the event.
With that, thank you for being with us today. And Professor Carney, the floor is yours.
Prof. Robert T. Carney: Thank you, Evelyn. As noted, the discussion today is on CIC Services v. Internal Revenue Service, a recent Supreme Court decision decided May 17. It presents a possible new direction in so-called pre-enforcement tax controversy.
So what's meant by pre-enforcement as opposed to post-enforcement? Pre-enforcement is an attempt by a taxpayer to litigate Treasury regulations or other published guidance that has been issued but which has not yet been asserted by the IRS against a particular taxpayer.
A taxpayer may feel that this notice will eventually affect them or the regulation may be in violation of the APA procedures or arbitrary and capricious, but they generally must wait until post-enforcement proceedings. Post-enforcement being when the IRS position has been asserted against a taxpayer in the form of an assessment or a statutory notice of deficiency has been issued. The taxpayer then is pretty much aggrieved, can raise APA violations in the context of litigation after either paying an assess tax and filing a refund suit or filing in the tax court.
The problem with pre-enforcement challenges in tax cases to tax regulations is the so-called Anti Injunction Act, Title 26, that's Internal Revenue Code, USC Section 7421. It's a post-Civil War statute. It was passed in 1867 and essentially the same form as incorporated into the Internal Revenue Code today. And it prohibits certain suits, and I'll just read quickly. It's only three lines.
It says, "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." So if that comes into play, basically, the Department of Justice will move to dismiss the suit for lack of jurisdiction.
Okay. So who is CIC Services? The petitioner in this case is a company that advised other corporations who were forming so-called micro-captive insurance companies. Now, we're obviously not going to get into the tax details on this. These are basically insurance subsidiaries that can provide legitimate benefits under the Internal Revenue Code to companies who engaged in these transactions.
However, the service views them as, I'd say, many, if not most, as potentially abusive and so therefore pursuant to authority they have under the Code to require reporting on potentially abusive transactions, they declared this to be a so-called reportable transaction by issuing a notice. It was not actually regulation. It was a notice, Notice 2016-66 that was requiring reporting by material advisors of which CIC admittedly was a material advisor with respect to these captive insurance companies. And so these reporting [inaudible 5:10] are authorized by the Code, and serious civil and criminal, even criminal penalties, can be imposed for non-compliance.
CIC, rather than wait to violate the law and potentially be subject to severe civil and criminal penalties, filed to enjoin the operation of the notice. So if this is a reporting requirement, why is the Anti-Injunction Act implicated? Well, because a provision of the Code, Section 6671, defines these reporting penalties as attacks, for all purposes of Title 26, the Internal Revenue Code.
So the question became was an attempt to enjoin the reporting requirements in the notice a violation of the Anti-Injunction Act simply because a violation of the notice reporting requirements would result in penalties denominated -- could result in penalties denominated as attacks? Or conversely, must CIC wait and violate the act first before it can challenge the notice in post-enforcement litigation?
The district court dismissed its complaint based on the Anti-Injunction Act, and the Sixth Circuit affirmed in a split decision. And they filed a petition for re-hearing en banc, and the petition for rehearing en banc was denied but with seven justices dissenting. And one of the judges on the court in the majority actually somewhat suggested that maybe the Supreme Court should take a look at this. And indeed, the Supreme Court did take a look at it. They granted cert and reversed in a unanimous decision, something not real common nowadays, and that is the status as of now.
And the question will become, as these other speakers will discuss, where might this take us in the course of future so-called pre-enforcement litigation? So with that, I will turn it over to Professor Hickman to summarize and comment on the opinion.
Kristin E. Hickman: Thanks, Bob. And I want to thank The Federalist Society for giving us a platform to talk about the CIC Services decision today. Before I talk about Justice Kagan's opinion in CIC Services, I want to highlight a couple of background points that were reflected in the briefing and that I think influenced the Court.
It seems to me that you have to look at this case in the context of a couple of broader trends in tax administration. For a few decades, starting roughly in the 1980s and up until relatively recently, tax administration had drifted away from general administrative law requirements, doctrines, and norms. In 2011, in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court started a process of reversing that trend when it declared that it was not inclined to carve out an approach to administrative review good for tax law only.
Justice Kagan abstained from the Mayo Foundation decision, but it was otherwise unanimous as well. And even though its holding was limited to the Chevron doctrine and its applicability to tax regulations, the opinion was interpreted by many people including the courts as signaling to Treasury and the IRS that they ought to do a better job of getting their practices in line with general administrative law.
So over the past 10 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. But one way in which tax continued to be different from the rest of administrative law was in a general understanding, not a clear holding from the Supreme Court mind you, but a general understanding that the Anti-Injunction Act precluded pre-enforcement judicial review of claims that Treasury and IRS rules and regulations violated the Administrative Procedure Act.
Another important development over the past several decades is the dramatic increase in the number of social welfare and regulatory programs that we run through the Internal Revenue Code and tasked Treasury and the IRS with administering. Traditionally, the role of tax administration has been to raise revenue for the government. We left the spending of that money to other government agencies. And to a great extent, much of the revenue raising has been handled through third-party withholding and information reporting.
Most federal tax revenue comes from individual income and payroll taxes, and anyone who's an employee knows that your employer withholds taxes from your wages and pays them over to the government for you. And then your employer sends both you and the government a W-2 at the end of the year, reporting both your wages and the taxes withheld from them. And with that system, for a long time, tax administration was able to focus its enforcement efforts on a few segments of the tax-paying public, like large multi-national corporations, high net worth individuals, small businesses with facts and circumstances that were not so easily captured through third-party withholding and reporting, and yes, tax shelters.
For the past few decades, however, Congress has involved the tax system and tax administration much more in achieving other goals. Treasury and the IRS now are heavily involved in regulating pensions and healthcare. They're very involved in regulating the nonprofit sector. The IRS now runs the government's largest anti-poverty programs in the form of the earned income tax credit and the childcare credit. And then there are environmental programs and economic development programs and lots and lots of different social and welfare regulatory programs that are run through the Internal Revenue Code.
When these sorts of programs are administered by other agencies, pre-enforcement judicial review of agency rules and regulations is the norm and has been for several decades. Now, the CIC Services case concerned the scope of the Anti-Injunction Act, as Bob suggests, and its implications for pre-enforcement judicial review of Treasury and IRS rules and regulations.
Since it's 1967 decision in Abbott Labs v. Gardner, the Court has interpreted the Administrative Procedure Act as adopting a presumption in favor of pre-enforcement judicial review of agency rules and regulation generally. By comparison, as Bob read to you, the Anti-Injunction Act precludes lawsuits for the purpose of restraining the assessment or collection of any tax except as otherwise authorized by the Internal Revenue Code.
And the effect of that provision generally is to defer judicial review of tax cases to post-enforcement refunded deficiency actions and thus to require individuals or entities seeking to challenge the validity of an IRS rule or regulation to pay the tax and sue for a refund. In a certain sense, the CIC Services case fell more in the range of traditional revenue raising in that it concerned third-party information reporting under the statutory and regulatory regime for reportable transactions, which was adopted to combat tax shelters.
On the other hand, as also came out repeatedly during the litigation, because the case concerned third party information reporting, it wasn't like the traditional Anti-Injunction Act scenario in which the taxpayer could pay the tax and seek a refund in order to obtain judicial review of its claim that an IRS rule or regulation violated the Administrative Procedure Act. So in this case, CIC Services brought a pre-enforcement suit challenging the validity of IRS Notice 2016-66 under the Administrative Procedure Act for its lack of notice and comment rulemaking procedures and reason decision making.
The Notice required tax advisors like CIC services who facilitate certain micro-captive insurance transactions to collect and report information about their clients' transactions to the IRS. And again, because the point of the Notice was to impose this third-party reporting requirement, CIC Services couldn't just pay the tax and seek a refund. In order to get to court, CIC Services would have to decline to comply with the reporting requirement in an effort to trigger a tax penalty, which it could then pay and seek to recover. And at least in theory, pursuing that course of action could open CIC Services to criminal prosecution in addition to civil tax penalties.
So throughout the litigation, CIC Services rejected the idea of deliberately violating the notice in order to obtain post-enforcement relief. So the question for the court was whether the pre-enforcement APA challenge brought by CIC Services against IRS Notice 2016-66 was for the purpose of restraining the assessment or collection of taxes and thus marred by the Anti-Injunction Act.
Now, as Bob mentioned, a divided Sixth Circuit had held that the AIA precluded judicial review of CIC Services' APA claim. In an earlier case, Florida Bankers Association v. Department of the Treasury, a divided D.C. Circuit panel had reached the same conclusion regarding a different third-party reporting obligation with then Judge Brett Kavanaugh writing the majority opinion for the D.C. Circuit.
The Supreme Court unanimously, in CIC Services, decided that the Anti-Injunction Act didn't cutoff CIC Services' claim, holding that CIC Service's suit was not for the purpose of restraining the assessment or collection of taxes, and thus that the Anti-Injunction Act did not apply. So writing for the Court, Justice Kagan crafted what I would describe as a very careful opinion that avoided sweeping rhetoric and instead emphasized the facts and circumstances of the particular third-party reporting requirement at stake in that case.
But at the same time, Justice Kagan managed to avoid putting the Court into too tight of a box with respect to future cases. And she drew lines and sent signals that could suggest that a future court might take advantage of the flexibility provided by her opinion to expand the range of Treasury and IRS rules and regulations that are eligible for pre-enforcement judicial review without running afoul of the CIC Services decision.
So first, Justice Kagan characterized the purpose of CIC Service's challenge to the IRS notice by looking to the remedy sought, which in this case were setting aside the notice, enjoining its enforcement, and declaring the notice unlawful rather than focusing on the eventual downstream effect, as she labeled it, of enabling CIC Services to avoid a tax penalty.
Declaratory and injunctive relief of the sort that was requested by CIC Services is the standard remedy under the Administrative Procedure Act when agency pronouncements are deemed procedurally invalid or arbitrary and capricious. In a footnote, Justice Kagan noticed that the government conceded that a pre-enforcement challenge to Environmental Protection Agency regulation governing the resale of diesel fuel, which regulation is enforced partly through a tax penalty, would not be precluded by the Anti-Injunction Act. So Justice Kagan then rejected the idea that the Anti-Injunction Act should apply merely because the Internal Revenue Service rather than the Environmental Protection Agency administers the regulatory mandate.
Justice Kagan then emphasized three conditions as demonstrating that the purpose of CIC Service's suit was not for the purpose of restraining the assessment and collection of taxes. The first condition was that the IRS Notice 2016-66 inflicted costs separate and apart from the statutory tax penalty in the form of compliance costs which CIC estimated would be in the tens of thousands of dollars each year.
Her second condition was that the notice's reporting rule and the statutory tax penalty are several steps removed from each other. And her third condition was that the violation of the notice would be punishable not only by a tax but potentially by separate criminal penalties. And regarding the third of these, Justice Kagan emphasized the fact that the only way that CIC Services could challenge the IRS notice otherwise was to disobey the mandate of the notice in order to trigger a tax penalty and thereby expose itself at least to the possibility of criminal prosecution.
Some commentors have suggested that the three conditions that were listed by Justice Kagan create a three-part test for avoiding the Anti-Injunction Act. And any time you see a list of three items in a Supreme Court opinion, it's really tempting to turn that list into a three-part test. But I don't think that was Justice Kagan's intent. Looking at her language carefully, although she makes very clear that the three conditions are obviously sufficient to overcome the Anti-Injunction Act, she never says that all three conditions are necessary to overcome the Anti-Injunction Act.
Instead, the critical dividing line drawn by Justice Kagan's opinion seems to be between regulatory taxes that are designed mainly to influence private conduct rather than to raise revenue versus regulatory mandates backed by tax penalties where the rule being challenged imposes a separate legal mandate where the tax appears on the scene only to sanction the mandate's violation.
Like revenue raising taxes, regulatory taxes fall within the scope of the Anti-Injunction Act, meaning that it's limitation on judicial review applies. But after the CIC Services case, third-party reporting -- regulatory mandates backed by tax penalties do not fall within the Anti-Injunction Act.
Now, third-party reporting requirements like those at issue in CIC Services are the obvious example now of regulatory mandates backed by tax penalties. But they're not the only example of regulatory mandates backed by tax penalties contained in the Internal Revenue Code. For example, see again that footnote regarding Environmental Protection Agency regulations governing the resale of diesel fuel that are enforced partly through a tax penalty.
I expect that drawing the line between regulatory taxes on the one hand and regulatory mandates backed by tax penalties on the other hand may not always be as simple as it was with the third-party reporting requirements at issue in CIC Services. Justice Kagan's three conditions really helped in that line drawing effort in this case. But other cases may reflect a different combination of conditions leading to a similar conclusion that a particular requirement is a regulatory mandate backed by a tax penalty rather than a regulatory tax.
Now, Justices Sotomayor and Kavanaugh joined Justice Kagan's opinion for the Court but also wrote separate concurring opinions to emphasize particular points that to my eye were relatively narrow. I will leave the discussion of the concurring opinions to later in the conversation if we have time.
I just want to close by pointing out that the litigation over the validity of IRS Notice 2016-66 is not over. It merely returned to the federal district court for consideration of the merits of CIC Service's APA claims. And we don't know how those are going to come out. But in the meantime, I think it's obvious that the Court's decision in CIC Services will lead to at least some number of additional pre-enforcement challenges, the Treasury and IRS rule and regulations under the administrative Procedure Act, and further judicial scrutiny of Treasury and IRS administrative practices.
I don't think the flow of litigation is going to be quite the deluge that Treasury and the IRS have predicted. I will also point out that even if the Anti-Injunction Act is less of a barrier than it once was when it comes to pre-enforcement judicial review in the tax context, it wasn't the only limitation on justiciability. I think we're now going to have an opportunity to explore issues like standing and likeness and finality in pre-enforcement litigation.
I also expect that the government and other proponents of limiting pre-enforcement judicial review in the tax context will try to limit the reach of CIC Service's decision, the third-party information reporting requirements or to tax advisors or to instances in which criminal prosecution has been threatened. But I will note that Justice Kagan's opinion imposes none of those limitations expressly and absolutely and meanwhile contains several hints that the Court may down the road favor interpreting the Anti-Injunction Act to permit pre-enforcement judicial review of APA based challenges against an even broader array of Treasury and IRS rules and regulations.
And with that, let me turn it over to my co-panelist.
Prof. Robert T. Carney: Professor, before, I just wanted to emphasize or highlight one point you made which I think is very obvious but definitely worth just re-emphasizing that the whole fight in this case was about the compliance cost, which I think came out around $60,000 a year, so there was no tax involved. It was strictly these compliance costs and as noted, the only way you could ever get to litigating an actual tax liability would be by violating the reporting requirement.
So this fight right now is about avoiding compliance costs, which as the opinion noted, CIC continued to incur while the case was pending because obviously they had to keep complying to avoid the criminal -- civil and potentially criminal liabilities.
So with that, I think we'll turn it over to Professor Morse to, again, discuss the government's position in the context of the Court's opinion.
Susan C. Morse: Thank you to The Federalist Society for including me in this webinar. I certainly appreciate it.
I was involved with the CIC Services case because I contributed to a brief with Daniel Hemel and Clint Wallace that was filed on behalf of former government officials from various administrations in support of the government's position in the case. And our brief focused on the tax shelter context of CIC Services so I'll start there, and then I'll make a few comments about the decision itself and then about possible next steps for the government following the decision.
I think the story of CIC began in 2000 with temporary Treasury regulations that created the idea of reportable transactions. Their purpose was to stem revenue loss that resulted from aggressive marketed tax shelters like the famous basis-shifting son of boss transactions. The reportable transactions framework cut a Gordian knot for the government by providing better information earlier. It solved the joint problem of non-detection, statute of limitation lapse, and collections difficulty that otherwise could foil an anti-tax shelter enforcement project.
In 2004, Congress enacted the reportable transactions framework with bipartisan support in the American Jobs Creation Act. Section 6707 imposes penalties when a material advisor fails to disclose reportable transactions. There are regulations that implement the statute, and these explain that transactions will be designated by notice. 30 notices were issued before the statute was enacted, and about a dozen have been issued since.
I do think it's pretty clear that Treasury and the IRS did what Congress intended them to do in this case. They continued to issue reportable transaction guidance according to an established plan of operation and habit. The legislative history makes clear that Congress agreed with the foundation and aim of the reportable transaction's scheme. As the House report says, the best way to combat tax shelters is to be aware of them.
Well, as most of our audience knows, a lot has happened in the relationship between tax law and administrative law since 2004. 2007 was the year that Professor Hickman published her coloring outside the lines study that revealed the gaps between IRS and Treasury administrative practice and another federal statute, the Administrative Procedure Act.
One of the key arguments, as Kristin argues in that paper and elsewhere, is that the APA requires notice and comment in a number of situations in which Treasury and the IRS have historically not used notice and comment. The project of bringing administrative law to tax law has enjoyed some success. Cases confirm that administrative law applies to actions taken by Treasury and the IRS.
One example is the 2011 Mayo case which brings Chevron into tax. Another is CIC Services, which says as we've reviewed that a tax specific statute, the Anti-Injunction Act, does not always bar pre-enforcement administrative law claims.
What is not yet clear is how administrative law will apply to tax law. If as Holmes proposed, the law is what we can predict a court will decide, then it seems to me the law of the relationship between administrative law and tax is in the process of becoming, It is not determined yet. CIC Services is a good example of this as well.
Going into CIC Services, a strong argument on behalf of the government was the Florida Bankers argument that Justice Kavanaugh articulated as a D.C. Circuit judge. It is textually clear under the statute that the penalty for promoter's failure to report is classified as a tax. Since the effect of a pre-enforcement suit would be to prevent the assessment of that tax, the AIA barred such a suit under the Florida Bankers analysis. As the government acknowledged in its briefing, there were some equitable exceptions to the AIA but, the government argued, equity was not on CIC Service's side.
The opinion that Justice Kagan wrote for the Court does not pick up on equitable exceptions. The rationale is presented as a textual argument that focuses on the word purpose. It says that the purpose of a pre-enforcement suit is case-specific. In this case, there were too many steps between the reporting requirement and the imposition of a penalty. Thus, the purpose of CIC Service's suit was not to restrain assessment or collection, and the Anti-Injunction Act did not apply.
Sometimes, we might expect a textual decision to offer certainty. I fully agree with Professor Hickman that the Court's opinion does not do so. I agree with Professor Hickman that the Kagan test is not explicitly conjunctive. I also would suggest that it might or might not be exclusive as to the factors it describes. Other items might also be relevant in determining what the purpose of a pre-enforcement suit is.
And I think that I diverge from Professor Hickman's view when it comes to third-party reporting in the sense that I'm not sure that it's clear from CIC Services that the AIA will still fail to apply and therefore permit any pre-enforcement challenge to a third-party reporting suit. There are some cases, W-2 reporting is one, which is inextricably linked with withholding. 1099 reporting, which is somewhat linked with backup withholding, is another example where the steps between reporting and assessment were fewer than they are in CIC Services.
This all puts the government in an interesting position. It seems to me that tax administrator's good government reputation depends on their fulfillment of two obligations. The first obligation is to enforce the law and to that end, craft and apply practical solutions that, for instance, raise the revenue the law requires.
The second obligation is to respect and protect taxpayer rights. The government, I think, has good arguments that Notice 2016-66 complies with administrative law requirements. It was issued under the authority of final regulations, and Congress endorsed the regulatory framework. And the IRS did collect and consider comments on the notice, although not in formal notice and comment format before releasing it in final form.
Nevertheless, I think it's worth considering what the government's next move should be. Maybe it should put the reporting position list through official notice and comment. I want to be clear, though, I don't mean that they would do this in any kind of perfunctory way. Of course, the preamble would give a careful explanation of the government's reasoning, and I think the government could easily clear the arbitrary and capricious bar for explaining why micro-captive insurance transactions and syndicated conservation easement transactions are included in the reportable transactions list.
Final notice and comment regs on reportable transactions would endorse the enforcement aspect while respecting taxpayer rights in precisely the way demanded by CIC Services, the government would have successfully pursued both of its obligations. And I find this a somewhat tempting or persuasive argument.
But I want to also offer the counterargument to that which is the following. I realize that in saying what the government should and shouldn't do, I should remember that the Treasury and IRS are involved in a practical exercise. It really won't do for Professor Morse to assume a can opener.
The government has resource constraints. Let me offer a question that might help illustrate the challenge the government now faces. And I'll confine the question just to the information reporting space. It seems to me the application of pre-enforcement actions to other kinds of tax guidance raises somewhat different issues. I'm happy to discuss that further later on if there's interest and time.
But the question I want to try to focus our attention on for a moment here is which information reporting regime should the government give priority to for notice and comment regulatory resources? Should it be the reportable transactions regime that issue on CIC Services on the theory that that will certainly be litigated? Should it be the regulations under the recently enacted Corporate Transparency Act which require the disclosure of beneficial owners of entities? Should it be the Biden administration's proposal to require reporting of banking account inflows and outflows? Should the government kick the tires of its stat curb regulations and guidance at issue in Florida Bankers? Should it undertake the project of studying what portion of the 1099 reporting requirements are supported by final regs and what elements are found in the forms and instructions? It seems like a difficult set of questions to me.
To the extent one takes the view that the APA is an important and even right-spaced constraint on the power of government, I acknowledge these questions may seem a bit silly. Not our problem if you like but rather the government's problem. The government will have to figure out how best to build its defenses. The taxpayers and other reporters and participants on the other side will attack as best they can. Good luck to both sides.
But I want to share with you that I take a different view. And to explain, let me share the number one concern that I had about my decision to contribute to a brief supporting the government in this case. I don't mean to speak from my co-brief writer's Hemel and Wallace. I want to say for myself that I thought about the government's dual obligation to enforce the tax law and protect taxpayer rights.
And I thought about what the worst risk would be if the government won the case, that is if the decision had gone the other way. If the government had won, I think the worst risk would be that the government would abuse the power that a win would have given it. Perhaps it would've established requirements attached to penalties, or the penalties were so severe or disproportionate, the taxpayer would have no practical choice but to comply with the government's administrative requirements.
The requirements maybe wouldn't be subject to judicial review because the taxpayer would comply without any need for government assessment action. This seemed like a risk to me. You may wonder how I got over it. Here is the analysis.
Even if treasury and the IRS act in bad faith, which I believe they generally do not do, the government is subject to constraints, to congressional oversight, presidential controls, judicial review, which taxpayers and tax shelter promoters really can engineer in most cases, I think, including in this case.
Therefore, I did not think that the risk of government overreach of CIC Services' loss was as big as the risk of taxpayer overreaction if CIC Services won. And I think the risk now that CIC Services has won is that the litigation from taxpayers and third-party reporters may be able to cause some tax enforcement to grind to a halt, which I think would be a pretty bad or tragic result. It would be interesting for me to hear whether Professor Hickman agrees with this evaluation that overlitigation by taxpayers is a risk now that CIC Services has now won, and I know that she mentioned this in her remarks and maybe it's a subject for the discussion today or at another time.
The risk, to be more specific about it, is that taxpayers and information reporters have power after this decision. They can choose to respond very aggressively to CIC Services. Maybe they can challenge quite a few information reporting requirements. Maybe they can challenge W-2 in some or all of the many flavors of 1099 reporting, FACA maybe, recent partnership reporting innovations, the corporate transparency act of regulations, the bank inflow and outflow reporting that is proposed by the Biden administration.
Now, to be clear, I don’t think all of these lawsuits would be allowed to proceed because I think the AIA still bars some of them. And I also think that to the extent that administrative law challenges are raised to these government reporting -- excuse me, raised to these information reporting requirements and litigated to conclusion, I think the government would win a lot of the cases. It does try to be careful and more careful since 2004, 2007, 20011 in its administrative law compliance.
But just the ability to file such cases hands private litigants very substantial power to throw sand into the wheels of government. To the extent third party reporting halts, the government is missing essential information. Without information, there can be no enforcement. Without enforcement, we will fail to uphold the tax law that Congress requires that we follow. So the risky thing about CIC Services to me is that it hands to private litigants a power that I hope they do not abuse.
It's not a sufficient response, I don't think, to say the IRS should've known better, that they should've been doing notice and comment all along, so they reap what they sow. In the reportable transaction case, I really think they did what they thought Congress had asked them to do. There was little reason for Treasury and the IRS to think in 2004 that notices were an inappropriate way to carry out the reportable transaction regime.
But more importantly than that, IRS is not a them, it's an us. IRS and Treasury are trying to protect and run our tax system, not their tax system. When IRS and Treasury succeed, we win. When they lose, we lose. Even over the last year, we've seen both of these results play out. The successful distribution of individual stimulus payments, deferral of payroll taxes, changed filing dates and so forth, was Treasury and IRS successfully carrying just some of 2020's special tax laws. These were wins.
On the other hand, the inability to record submitted tax filings or answer taxpayer phone calls were not wins. It brings us back to resource constraints. Treasury and IRS can't do everything, and this will remain true just with a different boundary, even if the funding is increased. Of course, we need to keep working through the relationship between administrative law and tax law. The change in mindset that Professor Hickman has explained and proposed, the understanding that administrative law has an important place in tax law, has indeed become a central, maybe the central contemporary issue in tax law.
It is my hope that we can figure out how administrative law applies to tax law without inflicting serious collateral damage on the ability of Treasury and the IRS to fulfill both their responsibility to enforce our tax law and the obligation to respect taxpayer rights. And I certainly look forward to comments and questions. Thank you again very much for the invitation to participate.
Prof. Robert T. Carney: Thank you, Professor Morse. One question that I thought we might -- before, there is one question pending that is very similar, perhaps, to a comment I thought or a question I thought deserves some attention. And that was Justice Sotomayor's concurring opinion where she states perhaps the result might be different if the case had involved a taxpayer as opposed to somebody with reporting obligations.
And I thought that also came somewhat close to the Florida Bankers case that you've been discussing where again there was a -- you might say a taxpayer, that was trying to avoid reporting -- well, he was an association but the people reporting would be potentially subject to the penalty. Is there a distinction if a taxpayer potentially subject to a tax is required to do reporting as opposed to a third-party material advisor as in the case of CIC? And Professor Hickman, would you like to lead off?
Kristin E. Hickman: You know, so and I think the short answer is we don't know yet. One of the things that's really interesting, I think, about the way this case came out -- anybody who listened to oral argument I think recognized that the government was going to lose. The real question was going to be how they do the lines and how the justices might divide up into different groups.
Justice Sotomayor ended up -- at least my perception from oral argument was that Justice Sotomayor was at one end of the continuum among the justices. And this is why I describe Justice Kagan's opinion as very carefully crafted, I think, in order to achieve the unanimity that she managed to achieve.
I think certainly there is a conceptual difference between third-party reporting requirements that are not so closely connected to taxes and reporting requirements when it is the taxpayer themselves who have been engaged in the transaction that would have to report. Obviously, there's a conceptual distinction there.
And that's the distinction that Justice Sotomayor draws. What we don't know is how the rest of the Court would divide or resolve the question, that same question, if that were the question that were posed. Justice Sotomayor's concurring opinion was on behalf of herself and only herself. It wasn't joined by any of her colleagues. It was fairly apparent to me from the oral argument that some justices would have pursued a line of analysis or seemed sympathetic to a line of analysis and an ultimate conclusion that would open up a much broader array of Treasury and IRS rules and regulations to pre-enforcement review.
So in a future case involving a taxpayer with a reporting requirement or a future case involving some other sort of regulatory mandate that could lead to a tax penalty, I just don’t think we can tell at this point how the court might divide and what the outcome might be. So that's one of the big open questions that's going to have to be explored in future cases.
Prof. Robert T. Carney: Professor Morse, did you have any thoughts on that?
Susan C. Morse: Sure. It seems to me an example of whether this idea about the number of steps between the failure to report and the imposition of a tax is important to the decision and whether the distinction is important enough to sway a majority of the court in a future case. It certainly has got to be true that if a taxpayer is required to report, say, a reportable transaction on her own return, there is a much closer link between that requirement to report and the assessment or collection of taxes with respect to that taxpayer.
So I think -- I tried a couple times to write something that said I think in future cases, this case would come out thus and such, and I really couldn't do it. So I agree that it's something to be decided in the future.
Prof. Robert T. Carney: Yes. I guess the idea would be, as you just noted, reportable transactions are also reported by taxpayers, not just material advisors. So these penalties can also be incurred in that way. And for certain types of transactions, as you know if they're not reported, you can even require publicly traded companies to be required to file a report with the SCC on where the penalty flag has been thrown.
So these are fairly heavy penalties that could involve personal livelihoods of tax department people, and I guess the question then would become if these, you might call collateral, there are so many potential collateral risks or punishments that aren't even monetary penalties that would not be a tax, I guess, that I would think would be potentially -- should still be subject to some review if -- as to whether the regulation or notice imposing the requirement is valid because otherwise, again, you have -- here, you may have virtually no way of challenging except to violate. Does that make -- I'm trying to flush out Justice Sotomayor's distinction, and I'm not sure I can see it.
Kristin E. Hickman: Oh, I mean, I think she had a very definite paradigmatic example in mind. I think she was thinking about the reportable transaction regulations and I think that she was recognizing that taxpayers sometimes have to report or the people engaging in the transactions who will suffer the tax consequences of those transactions have an obligation to report under the reportable transaction regulations in addition to third party tax advisors having a reporting requirement.
It's just a question of whether that dividing line between tax advisors and the taxpayers themselves, whether that dividing line that makes sense to Justice Sotomayor is the same dividing line that makes sense to other justices or whether they are focused on other aspects of these different conditions that Justice Kagan focused on or whether they perceive other conditions as being relevant.
It's just really hard to say at this point in time. We're just -- it was a very -- it's a really interesting opinion in the way that it is both crafted narrowly and yet simultaneously -- with respect to the facts and circumstances of the particular case at bar, but yet simultaneously manages to avoid boxing the court in.
Susan C. Morse: I agree with that.
Prof. Robert T. Carney: Does anyone want to comment further? I was particularly interested and it was brought up earlier about the fact that Florida -- I think Professor Hickman mentioned that Florida Bankers was a case in the D.C. Circuit when then Judge Kavanaugh wrote the opinion that basically said it was -- he found it to be a tax and didn't -- well, it was a tax and he was going to apply the Anti-Inunction Act as opposed to the Direct Marketing case which we haven't really discussed much, which was heavily involved in the opinion.
Direct Marketing being a state case out of Colorado where online marketers were being hit with reporting requirements by the state, and they asserted the Tax Injunction Act which is parallel to the -- and the Supreme Court has held, it's the same basic language. It's a parallel provision that says that federal courts can[not] enjoin state assessment and collection.
And in Direct Marketing, the Supreme Court upheld an injunction despite the Tax Injunction Act and allowed a pre-enforcement litigation. And that case was distinguished by Judge Kavanaugh in the Florida Bankers case saying that well, in that case, what was being enjoined was just reporting and it was not -- a violation was not denominated, or a penalty was not denominated as tax so therefore they weren't really enjoining a tax. Whereas in Florida Bankers, it was an interest reporting requirement that if you violated it, it would impose. A penalty would be deemed to be a tax.
And then I thought it was interesting though in this opinion, Direct Marketing was a primary basis for the decision and Judge Kavanaugh concurred in that. So are we really turning on the fact that reporting in general is going to be perhaps more subject to injunction and the -- even if the penalty ultimately is deemed to be a tax, if you have to incur the penalty in order to litigate, I think that that could be read very -- apply very broadly to reporting requirements, particularly if it's not, as Justice Sotomayor noted, an actual taxpayer who's involved. Any further thoughts on that?
Kristin E. Hickman: One thing that's interesting about this whole line of cases, whether you're talking about Direct Marketing or Florida Bankers or NFIB v. Sebelius, which has also been mentioned in this litigation in this case, is that when it comes to the text of the Anti-Injunction Act, we've got a lot of terms that are susceptible to both broad and narrow interpretations.
Justice Kagan focused on the word purpose. In the Direct Marketing case, it was Justice Thomas, I believe, writing for the Court, focused much more on the meaning of the word restraining as well as the meaning of assessment and collection as being particular functions under the tax laws. We talked about what is a tax and the fact that penalties are often labeled as taxes but not always labeled as taxes within the Internal Revenue Code.
So some of it depends upon, I think, which word or words the Court wants to focus on as a textual matter when they're deciding the particular case at bar. And that, down the road, I think is also going to be relevant in determining the aftermath, if you will, of CIC Services.
Susan C. Morse: One way to further push that is to address the comment, I think in the chat, which asks for a run of a 1099 hypothetical.
Prof. Robert T. Carney: That's where I was going to go next.
Susan C. Morse: Good, I'm glad. Yeah.
Prof. Robert T. Carney: Yes.
Susan C. Morse: So the -- this is interesting if one thinks about the number of steps between a reporting requirement and the imposition of a tax, I would line it up and just thinking about third-party reporters, not direct taxpayer reporters here, with the reportable transactions on the most steps or the least close connection and maybe W-2 reporting as the closest connection because it's so closely linked to backup withholding. And then after W-2, a little bit further removed, might be 1099 reporting, which of course comes in many different flavors and kinds. And then maybe FACA is in between 1099 and reportable transactions.
So you might not agree with that order, the continuum, but I think there is some kind of continuum there. So the hypothetical in the chat suggests that a third-party reporter would sue to enjoin the requirement of an ID number on form 1099 on arbitrary or capricious grounds or on other constitutional -- it says here, well, maybe it will stick to administrative law grounds since I'm a little more comfortable with that at the moment, and we can -- I don’t actually know the question -- the answer to this question, but if we want to make a really strong example, we can assume that the regulations don't require the inclusion of a 1099.
I have to -- I would think the regulations do include that requirement, by the way. But if they don't include the requirement, it's more similar to the CIC Services case. So if the government received that challenge, I would think the first thing they would do is they would say look, CIC Services doesn't apply because the connections much closer between 1099 reporting and payment of tax. For example, you can usually match line items from a 1099 to line items on a tax return. That would be the first line of argument.
And then if it turned out that the court said no, the AIA doesn't bar that case. It allows it to proceed in a pre-enforcement manner, then of course, the taxpayer or the reporter has to show irreparable harm and likelihood of success on the merits. And that's where we get into the fact that actually, this seems to require a showing of a really strong administrative law argument in order to win the injunction, I mean to say.
So partly for that reason and partly because I think that the 1099 regs actually are fairly well-detailed and established, I'm just not sure that the third-party reporter wins that pre-enforcement case, even if it is allowed to proceed.
Kristin E. Hickman: I will also point out, and this is another issue that we haven't -- that we have yet to see how it's going to play out. Particularly when you're talking about long-standing and well-established regulations, pre-enforcement judicial review may be off the table altogether.
There is a general six-year limitations period under Title 28 of the U.S. Code. I'm blanking on the precise section at the moment. But for challenging agency regulations on procedural and process grounds, arbitrary and capricious APA type grounds, generally, you only have six years to bring those sorts of claims.
Now, the only case that I've heard of that brought that up in the tax context, it came out briefly at oral argument in the Altera case. And the answer that was given well was but the Anti-Injunction Act has cutoff pre-enforcement judicial review, so it couldn’t have brought that. At least that was the argument that was made at oral argument. There may have been something later in the briefing that I missed. But in any event, now that -- exactly what CIC Services does with respect to that six-year limitations period and long-standing regs like the 1099 regs in pre-enforcement judicial review I think is a real question.
It may be that that general limitations period provides a certain grandfathering to the IRS with respect to procedural and process challenges, which frankly on a certain normative level might not be a bad thing. Recognizing that the IRS has -- wasn't always entirely aware of its obligations under the Administrative Procedure Act, perhaps, and that the IRS, generally speaking, I think, in this regard has been well-intentioned. Although, there are exceptions. I think that maybe that could be a way of threading all of this to do a start over. The last six years would still be on the table, but the really old stuff wouldn't be.
Prof. Robert T. Carney: That's a really good point, Professor Hickman. I'm glad you brought it up, because the Altera case, the government had to get out of what might be a total catch-22 where they say you can't litigate the Administrative Procedure Act matters because of the Anti-Injunction Act until it's being enforced. But of course, the time it takes to get to enforcement, by the time you get there, the statute -- this general statute has run and so therefore, you can't -- you're either barred by the Anti-Injunction Act or you're barred by the statute of limitations. And the government graciously but I think necessarily said no, we're not going to put taxpayers in that position. You will be able -- the statute sort of told, if you will, and you will be able to litigate post-enforcement under the APA. And that's what happened in Altera.
Susan C. Morse: That's what I recall, so yeah.
Prof. Robert T. Carney: Well, I see Evelyn is back on. It looks like we are coming near the end of our time. I don't see any other questions pending.
Susan C. Morse: There is one in Q&A, but I'm not sure we have time for it. It's about a possible statutory change. I guess that is possible because the AIA is a statute that could be amended.
Kristin E. Hickman: Well, and the Administrative Procedure Act is a statute as well. All of this is statutory law, so there is nothing stopping Congress from stepping in and altering the regime with respect to judicial review of these sorts of claims either one way or the other. And I think given the fact that the Anti-Injunction Act was enacted in 1867, a little bit of careful congressional consideration in this instance might be worthwhile. The world has changed a lot in the last 150 years. It might be time to revisit all of this statutorily.
Susan C. Morse: Agree.
Evelyn Hildebrand: Well, thank you all for a fantastic discussion. I don't know if you have a final comment, Professor Carney? Or we can close out since we are at the hour mark.
Prof. Robert T. Carney: No. I think we have very much covered all the bases. I appreciate very much Professor Morse and Professor Hickman. I think we have covered this thoroughly, and hopefully, if anybody else has any questions, feel free to email us.
Susan C. Morse: My pleasure. Thank you for having me.
Prof. Robert T. Carney: Thank you.
Kristin E. Hickman: Thank you very much. We appreciate it.
Evelyn Hildebrand: Thank you both very much. And I just add to that thanks. Thank you to our audience for participating and sending in your questions. And if you have any feedback to send in, we welcome listener feedback by email. The address is [email protected] As always, keep an eye on our website and your emails for announcements about upcoming Teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.