On December 1st, the Supreme Court heard oral arguments in the case CIC Services, LLC v. Internal Revenue Service. The case involves whether courts have jurisdiction over challenges to the validity of Internal Revenue Service rules or regulations under the Administrative Procedure Act before the taxpayer pays a tax and seeks a refund. The specific issue presented was whether the prohibition in the Anti-Injunction Act (26 U.S.C., sec. 7421, “AIA”) on lawsuits “for the purpose of restraining the assessment or collection of any tax” bars challenges to regulatory mandates issued by Treasury/IRS in the form of information reporting requirements that could lead to the assessment of tax penalties. In CIC Services, the Government asserted that the AIA barred pre-enforcement litigation challenging reporting requirements that could have significant civil and criminal penalties attached for non-compliance, where the civil penalties are denominated by the Internal Revenue Code as a “tax” but where no violation had yet occurred. The case came to the Supreme Court on a writ of certiorari to the U.S. Court of Appeals for the Sixth Circuit, which had affirmed a district court opinion dismissing the case under the AIA for lack of jurisdiction.
We are joined by a panel of experts to discuss the oral arguments, and the various policy implications of the potential rulings.
Prof. Robert Carney, Senior Counsel, Caplin & Drysdale, and Adjunct Professor, Tax Practice and Procedure (Administrative), Georgetown University Law Center
Prof. Kristin Hickman, Distinguished McKnight University Professor and Harlan Albert Rogers Professor in Law, University of Minnesota Law School
Prof. Gregory Dolin, Co-director of the Center for Medicine and Law, University of Baltimore School of Law, and Adjunct Scholar at the Cato Institute
Please dial 1-888-752-3232 to participate.
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 www.fedsoc.org.
Nick Marr: Welcome, everyone, to The Federalist Society’s teleforum conference call as this afternoon, December 11, 2020, we’re having a teleforum discussion on “The Implications and Importance of CIC Services, LLC v. Internal Revenue Service.” I’m Nick Marr, Assistant Director of Practice Groups here at The Federalist Society.
As always, please note that expressions of opinion on our call today are those of our experts.
I’ll be introducing our panel of three experts. I’ll start with our moderator, Professor Robert Carney. He’s Senior Counsel at Caplin & Drysdale and an Adjunct Professor at Georgetown University Law Center. We’re joined also as our panelist by Professor Kristin Hickman. She’s Distinguished McKnight University Professor and Harlan Albert Rogers Professor in Law at the University of Minnesota Law School. Professor Gregory Dolan is Co-director of the Center for Medicine and Law at the University of Baltimore School of Law and an Adjunct Scholar at the Cato Institute.
We’re very pleased to have all of our panelists here with us today. And to the audience, we’ll be looking to you for questions a bit later in the hour, so be thinking of those and have them in mind for when we get to that portion of the call. Thanks very much for being with us today. Bob, I’ll hand the floor off to you first.
Prof. Richard Carney: Great. Thanks, Nick. Well, as Nick said, on December 1, the Supreme Court heard oral arguments in the case of CIC Services, LLC v. Internal Revenue Service. That case involved whether courts have jurisdiction over the lawsuits under the Administrative Procedure Act challenging the validity of Internal Revenue Service rules and regulations prior to lawsuits seeking recovery of taxes already assessed and paid. As you all know, the APA provides the normal procedure for challenging administrative rules and regulations. However, until 2011 in the case of Mayo Foundation v. United States, it wasn’t clear. But the Supreme Court made clear that treasury regulations are subject to the same validity tests as non-tax regulations. And as a result, also the APA standards must be met.
In 2016, IRS issued Notice 2016-66, which Greg will be talking about a little later in more detail, basically imposing certain reporting for micro-captive insurance transactions. And the question was whether the prohibition of the so-called Anti-Injunction Act, 26 U.S.C. Section 7421, on lawsuits, quote, “for the purpose of restraining the assessment or collection of any tax,” unquote, bars challenges to regulatory mandates issued by Treasury or IRS such as the notice in question that require reporting of information that could lead to the assessment of taxes but don’t directly impose a tax.
Ordinarily, tax regulations can be challenged only after the IRS asserts a deficiency or taxes paid and the refund is claimed. Here, the notice imposed significant compliance costs which could never be recovered once they were incurred. Nevertheless, the IRS said in order to challenge the notice under the Administrative Procedure Act, you must first violate it and then incur civil and, indeed, possibly criminal penalties, and then sue for a refund. So the Court -- obviously, some of the justices were somewhat concerned about that proposition.
And so at this point, I’ll turn it over to Greg to describe in more detail what the notice was, and then Kristin will talk more about the petitioner’s positions.
Prof. Gregory Dolin: Thank you, Bob. Thank you all for joining us. And thank you to The Federalist Society for hosting this event and inviting me to speak. As always, it is a pleasure to join The Federalist Society as well as this group of panelists that will be with me.
So I’m not going to get into huge detail about the notice but just to give a bit of an overview. And so for those who are interested in learning a bit more about it, this is all in the government’s brief, roughly on pages 2-7.
But the basic story is that over the course of time, Congress and the Internal Revenue Service became concerned that there are some transactions that are engaged in for the purposes of no specific reason other than hiding income. And they have developed two types of -- they do a classification of two types of transactions. One that’s called lifted transactions, which are basically everybody knows that these are just tax avoidance schemes and do nothing else beyond that, and those are treated as such. And then so-called transactions of interest, or TOIs, these are transactions that could be engaged in for tax avoidance purposes but could be engaged in for other legitimate purposes as well.
But of course, since the law evolved and human behavior evolved and financial sophistication evolved, there’s no -- the list of these transactions also changes every so often. And what IRS did is they promulgated a rule saying that -- listing some of these transactions, but also saying that these transactions would include anything else that IRS might later declare to be a transaction of interest by any sort of written document, whether by formal rule or by guidance or by some other method. And in this case, it was the guidance that IRS promulgated, so it was not a formal rule made with notice and comment or anything of that sort. And instead, they promulgated a guidance specifically targeting transactions which are called micro-captive transactions.
And again, without getting into great, huge detail, the main concern is the transactions where a taxpayer pays insurance premium to a company that is also controlled by the same taxpayer. And so it pays a premium to insure putative risk, and makes this putative insurance payment, and gets to exclude the debt payment from his own reportable income. And then because the recipient, the so-called insurance company, which may or may not be a true insurance company, gets to exclude the payment under a different provision of the Internal Revenue Code, thus making the money that’s sloshing back and forth potentially not taxable at all.
And again, some of these transactions may be entirely legitimate, and some may not. And so for the IRS to know which ones are which, they’ve made a requirement that these transactions, the existence of these transactions be reported to the IRS. And they backed up this requirement by penalties. And what’s interesting in this case is that the requirement applies both to a taxpayer, so to the persons who engaged in these micro-captive transactions, as well as to anybody who advises them, so financial advisors, banks, managers, tax advisors, people like that who help structure these transactions for the benefit of the taxpayer.
And again, some of these transactions are entirely legitimate and people engage in them for entirely legitimate reasons. And tax advisors advise them for entirely legitimate and lawful reasons. But whether they’re lawful or unlawful, or taxable or not taxable, reporting must be made.
And so this suit was brought — and at this point I’ll turn it over to Kristin — the suit was brought to challenge the requirement not so much by the taxpayer but by these third-party entities who said that the requirement to collect the information, to put it together into any sort of reportable document, and also to report to the IRS is particularly onerous because no tax is due from them other than potential penalties for violating the reporting requirement. In this, you have the right to sue pre-enforcement.
But at this point, I will turn it over to Kristin to discuss what the objection is. And at that point, I will come back and discuss what the government’s response to the lawsuit was.
Prof. Kristin Hickman: Thanks, Greg. And I, too, want to express my appreciation to The Federalist Society for hosting this call.
As Greg suggests, Notice 2016-66 is basically looking for information. The IRS said, “We think some, but we don’t know how many, of these kinds of transactions may be problematic for tax purposes, might represent abusive transactions,” and so consequently established this third-party reporting requirement by labeling micro-captive insurance transactions as transactions of interest.
CIC Services is a material advisor who helps to facilitate these sorts of transactions, and as a material advisor, under Notice 2016-66, was required to both collect and report information about its clients to the IRS. And if it declined to do so, these information collection and reporting requirements are enforced by some pretty hefty penalties. And for that matter, as CIC Services pointed out, if it had to violate the notice in order to get to court, then it would be willfully violating the notice, and consequently, it would be guilty, potentially, of committing a crime.
There are different ways of construing the taxpayer side of the CIC Services case. I filed an amicus brief in the case based on my 2017 Virginia Law Review article with Gerald Kerska in which we argue that the best interpretation of the text and history of the Anti-Injunction Act would allow pre-enforcement judicial review of all Treasury and IRS rules and regulations subject to other justiciability limitations like standing, finality, or ripeness.
CIC Services took a much narrower position in this case, unsurprisingly. CIC Services focused particularly on the fact that the standard Anti-Injunction Act option of paying the tax and suing for a refund simply isn’t available to it. Again, Notice 2016-66 imposes information collection and reporting requirements that are enforced by penalties. And for Anti-Injunction Act purposes, those penalties might be considered taxes. And they will only be assessed and come due if CIC Services first breaks the law to incur the penalties.
CIC Services refuses to break the law. They emphasize that they are and want to be law abiding, so according to CIC Services, it will never incur the penalty. So without pre-enforcement judicial review, CIC Services will never be able to challenge the validity of Notice 2016-66. Instead, it will have no choice but to continue to incur the costs of complying with the regulatory burden imposed by Notice 2016-66 year after year after year.
And indeed, at oral argument, Cam [Norris] for CIC Services repeatedly emphasized that the IRS’s interpretation of the Anti-Injunction Act would require CIC Services to commit a crime and basically violate Notice 2016-66 in the hope that the IRS would assess a penalty that CIC Services could then pay and seek to have refunded, which isn’t going to happen, according to CIC Services.
So also as part of its argument, CIC Services relied heavily on the Supreme Court’s 2015 decision in a case called Direct Marketing Association v. Brohl. Direct Marketing Association concerned a different statute, the Tax Injunction Act, which limits federal court review of state tax cases but uses very similar language to the Anti-Injunction Act. The Supreme Court historically has construed the Tax Injunction Act and the Anti-Injunction Act very similarly to one another, recognizing that the Tax Injunction Act was patterned off of the Anti-Injunction Act and serves similar purposes.
The Court in Direct Marketing held that the Tax Injunction Act did not cut off a challenge to a Colorado statute requiring out of state retailers to report information regarding their Colorado customers to the Colorado Department of Revenue. So both the Tax Injunction Act and the Anti-Injunction Act speak of restraining the assessment and collection of taxes.
In a response to a question from Chief Justice Roberts, Cam Norris for CIC Services emphasized that Direct Marketing defines restraining for this purpose not as an impediment to eventually assessing or collecting taxes but more proximately as stopping the actual formal process of assessment or collection essentially in process. CIC Services, according to Norris, has not even been threatened with assessment or collection yet because it hasn’t violated Notice 2016-66, and it’s really only challenging the validity of the regulatory burden imposed by Notice 2016-66 rather than anything that’s more directly leading to penalty assessment or the collection of taxes.
I think most people listening to the oral argument — and I’ll be interested to hear if Greg perceives it the same way — but I came away with a sense that CIC Services is likely to win the case. A couple of the justices did express some skepticism, though. Justice Sotomayor seemed the most skeptical of CIC Services’ position, I think, pointing out that the Supreme Court’s 1973, I believe it was, decisions in Bob Jones University v. Simon and Alexander v. Americans United seemed to stand for the proposition that if a tax might ever be collected as a consequence of a Treasury or IRS rule or regulation, then the Anti-Injunction Act would bar a challenge to it.
Also drawing from an amicus brief filed by a group of former government tax officials and authored with the assistance of several tax professors, Justice Breyer asked why CIC Services couldn’t obtain judicial review by petitioning the IRS to pursue notice and comment rulemaking, and then if the IRS declined, challenging that decision under the Administrative Procedure Act.
Norris responded correctly, I think, that challenging a denial of a petition for rulemaking under the Administrative Procedure Act is not the same thing as raising a procedural challenge against the validity of Notice 2016-66 for its lack of notice and comment. They’re simply different claims, and the statutory requirements and the standards of review for each are vastly different. A challenge to a denial of a petition for rulemaking is evaluated very, very deferentially under the arbitrary and capricious standard, while a claim that a guidance document should have gone through notice and comment rulemaking is reviewed de novo.
Justice Breyer seemed to appreciate that distinction, and I thought that he later pushed the government pretty hard to justify why someone should have to violate the law in order to obtain judicial review. But the mere fact that Justice Breyer explored the alternative means of getting to court suggested at least that he was not sold on the argument raised by CIC Services.
On the other hand, Justice Kavanaugh, when he was a judge on the D.C. Circuit, wrote the opinion in a case called Florida Bankers Association in which that court held that the Anti-Injunction Act barred pre-enforcement judicial review of a different information reporting requirement. In Florida Bankers, then Judge Kavanaugh distinguished the Direct Marketing case, and yet, even Justice Kavanaugh seemed supportive of CIC Services in the oral argument in this case.
He started out his questions by observing that the penalty for violating Notice 2016-66 would be a tax for Anti-Injunction Act purposes. He contended that Direct Marketing is distinguishable because the penalty in that case was not a tax, unlike the penalty in this case as a statutory matter. And he maintained that the Supreme Court’s 1974 decisions in Bob Jones and Americans United pose a problem for CIC Services.
Yet, Justice Kavanaugh then suggested that Bob Jones and Americans United should not be read for all they’re worth, and that the Court ought to back away from some of the implications of those cases for challenges to regulatory taxes for the reasons offered by CIC Services, most notably that it’s unfair to ask a party to violate the law in order to obtain judicial review. Justice Kavanaugh’s question for CIC Services was how best to do that. He even broached the possibility of flat out overruling Bob Jones and Americans United.
So because of his opinion in the D.C. Circuit in Florida Bankers Association, I have long assumed that Justice Kavanaugh would be a solid vote in the IRS’s favor in CIC Services. So the fact that Justice Kavanaugh seemed open to making an exception for regulatory tax penalties or even flat out overruling Bob Jones and Americans United was truly striking.
Most of the other justices in questioning Cam Norris for CIC Services seemed more interested in trying to figure out how to draw lines to allow CIC Services’ suit to go forward. Justice Thomas wrote the Court’s opinion in Direct Marketing, so it might not be too surprising that his questions seemed supportive of CIC Services’ position, allowing Norris to emphasize the parallels between the two cases and the fact that not only has CIC Services not violated Notice 2016-66 itself, but an amicus brief filed by several state captive insurance associations declared that industry representatives were not aware of any captive insurance provider who had violated Notice 2016-66 or incurred any tax penalties under that notice.
Justice Alito specifically asked Norris when a challenge to an IRS regulation would be barred by the Anti-Injunction Act, and here Norris suggested that the Anti-Injunction Act would cut off judicial review when a violation has occurred and a penalty has been assessed or would imminently be assessed, at which point the challenger would be in a position of paying the tax and suing for a refund.
Justice Kagan asked about whether the narrow equitable exception to the Anti-Injunction Act recognized by the Supreme Court in a case called South Carolina v. Regan might apply in this case. Norris didn’t quite say yes or no to that question. At least CIC Services has never framed its argument as purely being about the applicability of South Carolina v. Regan. And Justice Kagan suggested that CIC’s case is different from Regan in a couple of ways. One, that there was a constitutional claim in Regan that is missing in this case, and also that South Carolina had absolutely no other way to get to court, whereas at least in theory, CIC Services has the option of committing a crime. Norris acknowledged those distinctions.
But Justice Barrett was also interested in the possibility of applying South Carolina v. Regan and suggested that it might be cleaner to acknowledge that the Anti-Injunction Act applies, but that if the only way you can get to court is by committing a crime, then you have no effective remedy available to you. And perhaps South Carolina v. Regan ought to apply to allow that equitable exception.
So again, just parsing though the justices, I think that CIC Services is going to have enough votes to win the case. To me, the question is how narrowly the Court will carve the exception or how the Court will interpret the Anti-Injunction Act to allow CIC Services case to go forward. This case could be a first step in expanding judicial review of pre-enforcement challenges to tax rules and regulations, or it could be a narrow exception that at least rhetorically seems to close that door for most tax rules and regulations.
But we haven’t talked about the government’s response yet or the questions that were asked of the government. So for that, I’m going to turn it back over to Greg.
Prof. Gregory Dolin: Thank you, Kristin, for that comprehensive review of both CIC’s position and the Court’s reception of that position.
So the government’s response -- before I actually get into it, let me kind of make a disclaimer here. At the beginning of the call, I notice they said that the views expressed are just of the experts, and it’s true as far as it goes. And I’ve agreed to talk about the government’s position, especially given the fact that Kristin filed an amicus brief on the petitioner’s side. Having read the briefs and oral argument, I tend to actually agree more with the petitioner’s position than the government, but I will do my best to represent what the government has actually tried to argue with the Court. And I will also say before I go any further that I think Kristin’s reading of the tea leaves is correct, that it seems that the Court was more receptive to the CIC’s position than the government’s.
But with that out of the way, let me recapitulate what government was arguing and how that argument was received in the Court. The government’s argument is actually very straightforward. The government argument proceeds as follows. Number one is that the requirement to report is, unlike some potentially other requirements that are enforceable by criminal penalties only, the requirement to report is first and foremost enforceable by a monetary penalty. And point number two, that Congress has in the Internal Revenue Code defined these types of monetary penalties as a tax, which then gets to point number three, that because this is a tax, it falls squarely under the prescription of the AIA, of the Anti-Injunction Act, which cannot be restrained by pre-enforcement challenge. So it’s a fairly straightforward syllogism.
The ultimate pushback to the government was the question of whether or not this is really, even though Congress defined it as a tax, whether or not this is really a tax. And Justice Kagan, I think, got to the point most clearly when she asked the government, “Isn’t it true that the tax here is entirely derivative of the reporting requirement?” In the sense that usually -- and so Justice Thomas also sort of hit that issue as well.
Usually, we pay taxes on some sort of economic activity. You go to work. You make money. You pay taxes on it. And you may disagree that you are or are not allowed to take some deduction, and so then you can argue with that point with IRS. And the rule is generally pay the money first and then go to court to get the money back from the IRS, potentially with interest, if you are correct about how certain deductions or certain tax rates should apply to you.
But here, as Justice Kagan pointed out, the tax has nothing to do with any sort of economic activity by the advisor. So maybe this case would have been argued very differently if it was the taxpayer who was engaged in these micro-captive transactions were to bring it. But the advisor here is not actually engaged in any taxable economic activity, and so the only reason taxes could be assessed is because of the failure to report.
And so that was really picked up by the Supreme Court. And so like I said, Justice Thomas hit that issue. Justice Kagan did. Justice Breyer, who as Kristin pointed out, was initially at least exploring some alternative avenues of resolving this issue such as asking why hasn’t CIC brought a petition for rulemaking and then appealed it and all of that.
Justice Breyer also suggested that one of the problems that CIC is facing is that they’re required to engage in this transaction — transaction meaning in the collection of information and submission of information and spend a bunch of money — or the alternative is to violate the law and potentially be liable for fairly significant penalties. And this issue was also heavily explored, the issue of that the penalties could actually be fairly heavy. And the ability to pay may be compromised.
The government’s response was, again, fairly straightforward, saying that the precedent has held that the fact that you may not be able to pay the fee or the tax is somewhat irrelevant to the application of AIA. And so additionally, the government said that what CIC could do is they could pay part of the fee as opposed to the entirety of it because the penalty is divisible, and then sue for a refund of that part with the government having to crossclaim for the remainder. And that way, at least initially, the material advisor like CIC would not be on the hook for multi-millions of dollars. Of course, if CIC loses, then all they have done is postpone the inevitable and still would be on the hook for a significant amount of money.
Even Justice Sotomayor, who I agree was the most hostile to CIC, even she explored this issue that part of the problem that CIC is facing is that if they wish to comply, and CIC expressed several times in their oral argument that in addition to wishing to avoid being penalized by the IRS and in addition to wishing to avoid committing a crime by willfully refusing to provide the information, they also have a professional reputation to uphold. They don’t want to be known, according to CIC, as a company that flouts IRS regulations or doesn’t follow them for some reason because that will look bad for them with their competitors and their clients. Nobody wants to seek financial advice from a company that basically doesn’t know what it’s doing and could get hit with fines from the IRS. And so that’s another reason that CIC brought up.
And Justice Sotomayor kind of explored that as well, said, “Look, they don’t want to spend all that kind of money which, even if they’re right, they will never actually get back. So their choice is either to be wrong and potentially be on the hook for significant penalties or spend hundreds of thousands of dollars that they may not have to spend because they were actually right that they don’t have to do it. But because they can’t do a pre-enforcement challenge, they will be forced to do it.”
And then the other questions of Justice Alito were -- they concerned the last point that Kristin brought up about this whole willfulness issue. The government represented to the Court that merely disagreeing with the IRS and refusing to follow the requirements, as long as you notify the IRS that that’s what you are doing or that you have a good faith disagreement that is not some sort of crazy conspiratorial theory, that you have a good faith disagreement, is not a willful violation.
So according to the government, you can file -- basically, CIC could merely send a letter to the government saying, “Look, we’re not going to do this. We know that your position is different, but here’s all of the reasons we don’t think we have to compile this information. So go ahead, assess your penalties, and then we’ll take you to court. Or we’ll pay the penalties, and then we’ll take you to court to get the money back.” And according to the government, if that’s what CIC does, sure, they might be on the hook for penalties, but at least their failure to submit the document, the requested information, would not have been willful and therefore would not be criminal. It would be just a civil matter about whether or not you ought to pay taxes or not.
And Justice Alito didn’t buy -- there was certainly -- the question betrayed his skepticism of that argument. He suggested that when the requirement is clear that something you should do as a legal matter and they just refused to do it for whatever reason, that sounds very much like willful violation of the law. And so government provided some potential line-drawing methods where a certain behavior may be defined as non-willful, but it’s not clear that the Court, or certainly at least Justice Alito, was buying that argument.
So that’s, I think, how the argument went. One issue that I wanted to raise is that what seemed a little odd to me -- so full disclosure, I’m not really a tax person. I do a bit more on the admin law side than purely tax. And so one issue that seemed relevant to me, just brought some flashbacks, is of a case Supreme Court decided a number of years ago, I think maybe five years ago by now, called Sackett v. EPA. And in many ways, the situation there was similar.
In Sackett, a number of landowners, the Sackett family, they wished to do certain things on their land, and EPA told them that they can’t, or if they do, they’ll be hit with significant penalties, up to tens of thousands of dollars a day. And Sackett brought a pre-enforcement challenge, to which EPA responded that you can’t bring a pre-enforcement challenge because there’s not yet a final decision by a governmental agency, so you have to await final decision, exhaust your administrative review avenues, and only then can you seek judicial review.
The Supreme Court unanimously rejected that — I think it was unanimous — rejected that position, saying that you shouldn’t have to risk complete financial ruination in order to challenge what might very well be unlawful government actions. And it was somewhat odd to me that that analogy was not made.
Now, granted, this was a different context. This was pure AP as opposed to Anti-Injunction Act. But it seems the logic of Supreme Court and this equitable exception that was explored by the Court with both AP and the government seems to fit very nicely with this presumption of pre-enforcement review which Chief Justice Roberts was hinting at, that there should be a fairly significant presumption of pre-enforcement review before subjecting the taxpayer or a citizen to significant government penalties. I don't know if this analogy would make it into the final opinion or not, but it just struck me as a little bit odd that it never really made it into anybody’s brief or questions at oral argument.
But the bottom line, I think the government’s position is appealing in its simplicity because it just goes these three points, boom, boom, boom, where it’s like this is enforced by a penalty, Congress defines the penalty as a tax, and taxes cannot be enjoined before collection. But I think that simplicity of the argument hides serious problems which the Court identified about the Hobbesian choice facing material advisors like CIC where they have to either risk their professional and financial wellbeing or potentially engage in the very expensive conduct of collecting and reporting information that they are not legally obligated to do.
So like I said, if I were to guess — and it’s always foolish to read coffee grounds based on the oral argument — but if I were to guess, I would suggest -- I would think that the Court would find an exception to the ban on pre-enforcement challenges, would reject government position, and would allow this regulation or this notice to be challenged as not having been properly promulgated and not therefore imposing any legal responsibilities on the petitioners.
Prof. Kristin Hickman: You know, Greg, you raise a really interesting point about Sackett v. EPA and finality. I will say, just generally speaking, other justiciability limitations like finality and ripeness and so on, all of the things that come from Abbott Labs and cases stemming from there regarding justiciability in the tax context, there’s a real paucity of those sorts of cases. We just don’t have very many of them because of the Anti-Injunction Act.
The Anti-Injunction Act has been the justiciability limitation of first recourse in the tax context. And because the Anti-Injunction Act has gotten in the way, the Court hasn’t had a lot of opportunity to analyze other justiciability limitations. They just don’t come up that often. Depending on how the Court interprets the Anti-Injunction Act, I think we’ll see more cases going forward about finality and ripeness as well as standing.
But certainly when you’re talking about a notice, an IRS notice, there are questions about finality. There’s a lot of variability in what notices do and the kinds of burdens that they impose. Certainly, this one by imposing penalties probably makes for a much easier finality analysis under cases like Sackett or Bennett v. Spear than maybe some other notices might. So that might be one reason why finality hasn’t really been raised as an obstacle. I think it’d be a real -- I think a finality agreement would be a real loser for the government with respect to Notice 2016-66 as compared to the Anti-Injunction Act argument that they raised.
Prof. Gregory Dolin: Kristin, I agree with that. So my point was not so much that this is or is not a final decision that the government should have made. It’s more about when are challenges proper and whether or not these rules that we generally view as a good system that does keep the Court somewhat constrained inside their jurisdiction because federal courts are, of course, courts of limited jurisdiction. Whether these rules are as inflexible as the government’s -- like I said, fairly superficial appealing position makes them out to be in this case.
And I think Supreme Court, at least in Sackett, said that they are not, that are these -- whether you define them as an equitable exception or just as a textual exception based on the meaning of the words in context or due process exception. So I think Supreme Court said that you shouldn’t have to require a citizen or a petitioner to risk complete financial ruin and potentially going to jail before you allow them to challenge government’s potentially illegal actions.
Prof. Kristin Hickman: Sure, absolutely. And that’s a sentiment that the Supreme Court has embraced going back as far as Abbott Labs v. Gardner. So it’ll be interesting to see how they reconcile that instinct I think that they have in favor of pre-enforcement judicial review with the text of the Anti-Injunction Act in this case.
Prof. Robert Carney: If I could jump in one second, I think, Kristin, I’d like to get your views as well on points that Greg raised which seemed to me when I was listening to the argument as somewhat maybe a concern by the government about the potential extreme -- justices potentially reviewing it as a somewhat extreme position. You have to violate a penalty involving very significant penalties and/or criminal violations.
And they came up with this divisible -- maybe it’s like a divisible tax, which if you’re -- certain excise taxes and others can be challenged, as Greg was saying, by paying tax on one item and then having the government counterclaim. And the concept of sending a letter, “Oh, by the way, I’m violating this law, but it’s not willful because I just told you I’m going to,” and whether -- it seemed to me that they were kind of in that respect making it up as they went along and not really being maybe that much concerned about how many different ways that could come back in other contexts.
But I’d like to get your reaction as to whether you thought they were also sensing some concern about this when they threw out that concept of, well, this could be a divisible tax. Just violate it once, like $50,000 worth or something, and then challenge that and let the government -- and maybe only violate it just with respect to one return or something, not with respect to a lot. And maybe then just challenge it in that context, and whether the government, the IRS would even assert -- I think you have to rely IRS cooperating and asserting the tax on that one violation.
Do you think that divisible tax, and write the government a letter, “I’m about to violate the law,” was really foreseeing the concern that several of the justices expressed on the government’s position in that regard?
Prof. Gregory Dolin: So if I may -- sorry. Go ahead.
Prof. Kristin Hickman: Go ahead. Go ahead, Greg.
Prof. Gregory Dolin: I wanted to go first on this one precisely because I’m not an expert in tax and so I can give my unvarnished, almost layman’s reaction, and then have Kristin tell me why I’m wrong, or perhaps confirm why I’m right.
And so to be honest, I didn’t really understand that argument at all. To be fair, I also didn’t understand the CIC argument saying, “Well, maybe the government will never penalize us, so we have to get sued now,” because my response, again, as a layman was, well, if you don’t get penalized, then who cares? So keep doing what you are doing.
But I certainly did -- this argument about divisibility of taxes just seemed very weird to me because it doesn’t actually answer pretty much anything in my view. So if the government is saying that, “Look, CIC, you are advising 100 different clients. Collect data and submit data for 99 of them. Don’t do it for one of them, and then we will just be subject for, whatever, $50,000 or $200,000 in penalties, and that’s not that much. But if you’re right, will even get that money back, and then in the following year, you don’t have to collect information for any of the 100 clients.”
But that doesn’t answer the problem that CIC said, basically a two-fold problem, that one, they’ll still be known, should they lose, as a bad financial advisor who doesn’t know what it’s doing with respect to government regulation, or two, that if they’re right and they actually win, then they’ve just wasted however many thousands of dollars collecting data for the 99 other people. And of course, it also doesn’t answer the objection that $200,000, I think it’s up to — actually, it could be potentially more because it’s a percentage — but up to $200,000 in penalties could be a significant risk.
And again, I don't know how big CIC company is. Maybe they’re a multi-billion dollar advisor, but maybe not. And so it doesn’t answer the question that just because you violated once, that somehow doesn’t expose you to significant financial and professional risk. So that argument didn’t make any sense to me at all.
Prof. Kristin Hickman: Well, it made sense to me in a couple of different ways, although I don’t find it especially persuasive, at least. So one thing I will say is there have been instances in the past where there’s disagreement -- the one in which I’m most familiar with it is an excise tax type situation where rather than having to pay -- if you really don’t think you owe millions and millions of dollars in excise taxes that are imposed on every single sale, pay it on one tax. Sure, if you lose, you’re eventually on the hook for having to pay it all. If it’s a $5 tax, let’s say, or a $50,000 tax even, if you pay a little bit now, if you lose, you’re going to have to pay the whole thing, and you’ll have to pay it with interest.
But while you’re litigating, your money isn’t tied up. You’ve got the liquidity still of only having to tie up a small amount of money in order to get into court. And I’ve seen situations where somebody will pay a small amount of tax in that sort of a way where it’s divisible in that kind of a way and they can just pay a little bit now in order to get -- almost kind of like an agreement with the IRS, as the IRS suggests, so that they can get into court and they can litigate it with the understanding that if they lose, they’ll have to pay the tax with interest in the long run.
But in the short run, they’re not tying up their funds. But usually those are civil cases, not criminal ones. And you’re not talking about having to violate a statute in a way that is -- where you’re trying to generate that regulatory penalty that we label as a tax for Anti-Injunction Act purposes. You’re really talking about just trying to manage the cash flow of the whole thing.
The other thing, though, that I think was interesting about is in the civil context, there is a provision. So if I as a taxpayer, somebody who owes income tax, if there’s some regulation or some rule that I think is just wrong, I can file my tax return with -- there’s a specific form the IRS has where you can literally flag for them, “Hey, I’m reporting my tax liability not in compliance with this rule or regulation because I think the rule or regulation is wrong, exceeds statutory authority,” or something to that effect.
And at a minimum, filing that form at least gets you out of being assessed penalties for noncompliance or for underpayment of taxes. It serves as a big red flag, “Hey, IRS, come audit me. Come issue a deficiency notice so we can litigate that,” but it’s at least an option that’s available. But that’s in the civil context.
And again, that reg is in the -- that form, I think, generally relates to underpayment of taxes, not information reporting requirements. So exactly how realistic the proposal that the IRS was making at oral argument, I really question how realistic it is in this kind of a case.
Prof. Gregory Dolin: And I think ultimately it gets to this notion that, again, as Justice Kagan explored with the government, and the government tried to actually press this issue, but I think Justice Kagan flipped it on them. The government’s position was that the key issue in Anti-Injunction Act is what is the purpose of the suit? Is the purpose of the suit to enjoin a collection of taxes? And the government’s point was because ultimately the notice is backed up by penalties which are treated as taxes, in essence, in reality, what the suit it trying to do is to enjoin collection of taxes.
But Justice Kagan suggested, and I think this dovetails with what Kristin was just saying, that this is not so much about tax. The purpose of the suit is to enjoin, really, the requirement to spend money on collecting information and that the tax is entirely derivative. And so in that sense, I certainly -- the example that Kristin gave about excise tax, that actually does make sense to me because you sold 100 widgets. You think that these widgets for one reason or anther are not subject to excise tax, so okay, you’re going to pay tax on one of them and going to withhold on 99, and that gets you the opportunity to get to court to litigate and IRS to crossclaim.
But the point is that if you are wrong, your taxes were due all the time anyway, whereas here, there was no taxes due ever unless you actually both violate the reporting requirement and the government chooses to assess tax in whatever amount that on that sliding scale the can. So yes, this whole divisibility makes sense to me as a general matter, just not in this context.
Prof. Kristin Hickman: Sure, although I will make the observation that both the at D.C. Circuit with then Judge Kavanaugh writing in the Florida Bankers Association case and in the Sixth Circuit, I think the majority of both of those circuit courts basically took a -- because they concluded that penalties are taxes, they really kind of took a “too bad, so sad” strict interpretation of the Anti-Injunction Act approach to the case that does put the taxpayer -- or not taxpayer, but does put a material advisor with a reporting requirement like CIC services into precisely this position.
To some extent, I think one aspect of this is do you really think of this -- we have this tradition in administrative law of pre-enforcement review. Admittedly, Congress can make exceptions from it. But do you want to think of the Anti-Injunction Act as creating that sort of exception from a norm of pre-enforcement review?
And that’s such a strong norm in the administrative law context that I really do think it’s going to be interesting to see whether the Court -- since I think that CIC Services will win, will the Court decide that it’s going to carve a very narrow exception for somebody just like CIC Services where the only way to get to court or the perceived only way to get to court is by essentially violating the law and potentially opening yourself up to criminal prosecution? Or are they going to try to find a way to interpret the Anti-Injunction Act to reconcile it more generally with that notion of pre-enforcement judicial review in a broader sense?
Prof. Gregory Dolin: I think we may be ready for questions.
Prof. Robert Carney: Yeah, those are all good points. Nick, do you want to open the floor?
Nick Marr: Yes, thanks. And Bob, I’ll hand the floor back to you. We don’t have any questions right now.
Prof. Robert Carney: Oh, good. No questions so far. That’s great.
Again, I thought the issue of divisible tax was also a very good one. And also, the issue of South Carolina v. Regan I thought deserved maybe just a little more comment because for those of us who are old enough to remember South Carolina v. Regan, South Carolina filed the original suit because of trying to issue tax exempt bonds because at the time, if they were denied tax exempt status by the IRS, basically, you couldn’t sell them. So their position was it was not just that you would incur some small penalty or that -- there would actually never be a taxpayer who would end up paying tax on those bonds because the bonds could never be issued without a tax exempt ruling. So South Carolina v. Regan perhaps was a more absolute bar on being able to litigate in a post-enforcement mode.
Here, it’s more of a question of being able to find the vehicle. One, of course, being the criminal barrier is one which wasn’t present in South Carolina v. Regan. But the divisible tax thing, I felt, did not address the problem in South Carolina v. Regan, or I should say brought them pretty close to the same situation as South Carolina v. Regan where you actually couldn’t get a post-enforcement form. Do the other panelists feel that way?
Prof. Kristin Hickman: As I mentioned before, I think that there are both analogous aspects to South Carolina v. Regan and also distinguishable aspects. South Carolina v. Regan also involved the constitutional question, and this case doesn’t.
And I will point out that the Court historically has construed the South Carolina v. Regan exception from the Anti-Injunction Act very narrowly. This is not something they’ve sought to apply expansively. So the fact that South Carolina v. Regan involved a constitutional question brought by a state, which, often, states carry a certain special status oftentimes in these sorts of cases, and that South Carolina had absolutely no avenue to get to Court other than by making an exception to the Anti-Injunction Act. Those do make this case a little different.
On the other hand, one of the things I think that was really concerning to the justices was whether telling a business, “You have to commit a criminal violation; you have to commit a crime in order to be able to get to court,” whether that really ought to be considered a viable option. Should we think of that as a circumstance in which CIC Services really doesn’t have an avenue to get to court? Maybe a roughly theoretical one, but certainly not a practical one that we should consider appropriate.
I think that was the import of Justice Barrett’s question to CIC Services in particular. It would be a bit of an -- it would arguably be an expansion of South Carolina v. Regan, but there’s a certain tidiness to that in some ways. Okay, the AIA applies, but we’ve got this slightly broader now equitable exception rather than trying to draw lines, for example, about what the word restraining means in terms of temporal proximity to the assessment or collection in question. Of course, any time you get into equitable exceptions and you start expanding equitable exceptions, then that becomes its own sort of fuzzy challenge of line drawing. So I don't know whether they’ll go that way or not.
I will point to one question asked of the government by Justice Gorsuch observing that the APA was promised as a solution to the growing power of administrative agencies over the national economy, observing that tax regulations cover all kinds of action activities in the economy from medical care to pensions, the non-profit sector, the education sector, child care, so on and so forth, and observing that the IRS does not have a tremendously great track record of compliance with the Administrative Procedure Act, and then Justice Thomas’s comment or questions about Direct Marketing Association.
I think that there are at least some justices that are open to the idea of trying to interpret the actual text of the APA rather than just expanding the South Carolina v. Regan equitable exception. But I don’t know how the justices that seem favorable to the IRS break down between those two alternatives.
Prof. Robert Carney: Yeah, I think those are all great points -- oh, go ahead, Greg.
Prof. Gregory Dolin: No, I have nothing to say. I think that Nick --
Nick Marr: -- It looks like we do have a question --
Prof. Robert Carney: -- I was just going to say those are all really good points. And one point of administrative law that is in here does not directly implicate and perhaps Anti-Injunction Act or when you get to review, but whenever you get to review, for those interested more in the administrative practice side of this, the so-called transactions of interest, or TOIs — all tax lawyers like acronyms — that basically, the regulation just says, “Oh, these things will be whatever or substantial transactions or substantially similar transactions that we put out in further guidance.”
And so this was like a notice. This was a notice that was issued pursuant to a regulation, but the exact violation of it -- you’re not directly violating the words of a regulation that had been promulgated under the APA. You’re violating a notice that was issued under an open-ended regulation that says, “plus whatever else we say later,” in guidance that’s not promulgated with notice and comment under the APA. So that’s just a thought I thought people should have in mind as we’re getting toward the end of this, if anybody has any other questions on it, because it throws another wrinkle into this that was not really much of an issue in the case.
Prof. Kristin Hickman: I think Nick was trying to let us know that there was a question. Is that right, Nick?
Nick Marr: We do have an audience question, yes. Thank you very much, Professor. So we’ll got to it now and try to get it in before the hour.
Caller 1: Yeah, hi. Thanks for taking my question. I just wanted to know what the applicability here might be for the use of hybrid civil/criminal statutes where it’s one thing if you don’t want to pay a tax, but it’s another thing if you’re, let’s say, in the firearms industry. If you violate the law there, the look is much worse. You are potentially a really bad person, I guess I’ll say, in the eyes of the law. How does this argument, or how might this argument apply outside of the pure tax context?
Prof. Gregory Dolin: So I guess it really depends on how broadly or narrowly the court construes it. So obviously, taxes are somewhat [inaudible 56:08] because we do have that Anti-Injunction Act. There’s no anti-gun regulation litigation act. But obviously, government -- this is not, like I said before, this is not the first time government has tried to limit people’s ability to come to court as was with Sackett where they said, “Look, you can’t bring any challenges until there’s some sort of final action.”
So I can imagine a situation — I don't know how successful it would be — but I can imagine a situation where, for example, the incoming administration comes up with some rule, say, on bump stocks or the magazine sizes or calibers of the guns or whatever. And it threatens people with a variety of penalties for not complying with some, say, very onerous reporting or storage or some other requirements, so perhaps not outright banning them but making it just very difficult to own them, and then when sued, responding and saying, “Well, you can’t sue us because there’s not a final enforcement action. So basically, break the law first. Then we might come after you and impose some kind of civil fines. Now, you have to appeal through whatever administrative process we have, and only then you might be able to go to court.”
I don't know how successful it will be, but obviously, the more solicitous the Court is of these sort of limitations on its jurisdiction, it could bleed into other areas. But I think at this stage, my reading is that this is somewhat of a tax specific context until we get to what Bob was talking about before. So if the taxpayer wins here, then the secondary question is not actually -- they don’t actually win on enjoining the statute. They would only win on being able to get to court. And the secondary statute is what is the authority of the IRS to impose legal requirements through basically just notice? And I think that creates much more interesting issues about the reach of the administrative state and what people and government can and cannot do.
Prof. Kristin Hickman: I will make a couple of additional observations. I do think, because this is a tax code specific provision that we’re interpreting, there is an extent to which it’s at least possible that the Court might, in construing that Internal Revenue Code specific provision, may speak in a way that this case doesn’t have a lot of broader applicability. But it’s also possible that they could speak more sweepingly. I think that there’s always in administrative law been this civil/criminal distinction, or at least for many years, there’s been a civil/criminal distinction where we treat the two kinds of cases differently.
But I think that there’s become a heightened awareness in about the last 10 to 15 years about the expanding -- just how expansively these hybrid regulatory statutes that are enforceable through both criminal and civil penalties, how many of them there are and how expansively they apply to people. Certainly, that’s come up in the Chevron context, and opinions by Judge Jeff Sutton of the Sixth Circuit, and also, it’s been debated in the academic literature. So it’s possible that they could end up saying something broader in this case that might weigh in to how we think about these hybrid regulatory statutes.
One last thing I will point out, too, that I think is worth emphasizing and that might distinguish this case from some others, even in a tax context, is here we are not just talking about paying a tax. We really are talking also about a reputational harm. It’s hard to overemphasize how being branded a tax shelter promoter is detrimental to your reputation in the financial services industry. They don’t want to be labeled as a tax shelter promoter. That’s going to hurt their business separate and apart from any sort of criminal penalties that they face. So that does make this particular case a little bit different even from a lot of tax cases. So that may have some influence, too, in terms of the reach of the eventual reasoning that the Court puts out.
Prof. Gregory Dolin: And I think that’s exactly why they’ve said on multiple times to the Court saying, “Look, however this comes out, we’re never going to break this regulation. We’re never going to risk and try to get into the court through incurring the penalties. We’re just not interested in doing that, not because perhaps we can’t afford to pay but because of these other concerns.” And I think that the questioner is kind of looking at the same thing. If you were, say, a gun dealer, are you going to risk being known as the gun dealer who sells guns unscrupulously? And most of them will say no, they’re not going to risk that.
Prof. Robert Carney: Nick, I think that we’re pretty close to the end of the program, unless anybody has anything else they want to throw in or any other questions. Otherwise, I will turn it over to Nick.
Nick Marr: Great. I was just going to offer a chance for closing remarks, but we’ve exhausted our time well -- lively discussion. Thank you all for joining us. And on behalf of The Federalist Society, I want to thank you, our experts, for the benefit of your valuable time and expertise today, and to our listeners for calling in. As always, be checking our website and your emails for announcements about upcoming Teleforum calls. We have another one coming up here shortly, so tune back in for that. Thank you all for joining us this afternoon. 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 www.fedsoc.org.