Case No. 19-930 | 6th Cir.
December 1, 2020
Preview by Amy Orlov, Online Editor
This case concerns principles of administrative law and tax law. Although the Internal Revenue Service has the power to collect taxes, Congress has the legislative power to write tax law. In 2004, Congress delegated authority to the IRS to collect information about tax shelters—methods that individuals or organizations may use for reducing taxable income, resulting in a decrease of payments to tax collecting entities. In order to track tax shelter information, the IRS requires taxpayers and their advisors to submit records pertaining to reportable transactions or be subject to substantial penalties. In November 2016, the IRS published Notice 2016-66 identifying certain “micro-captive transactions” as a subset of reportable transactions. Thus, any taxpayer or advisor who engages in these transactions is required to report them.
In March of 2017, CIC Services, a company that advises taxpayers on complex transactions, including micro-captive transactions, sued the IRS and the Treasury Department for promulgating the micro-captive transactions Notice without abiding by the Administrative Procedure Act (“APA”). 5 U.S.C. § 551 et seq. (2018); see § 702. CIC Services challenged the validity of the regulation through pre-enforcement review—a process that allows an individual or entity to challenge an agency action without having to first violate the regulation and risk the often severe consequences that follow. CIC Services asked the lower court to stop the IRS Notice from taking effect.
In response to CIC’s challenge, the IRS invoked the Tax Anti-Injunction Act to block the challenge and prevent CIC’s legal arguments from being heard. 26 U.S.C. § 7421(a) (2018). The Anti-Injunction Act strips federal district courts of jurisdiction over any lawsuit designed to restrain the assessment or collection of taxes. In most instances, under the Anti-Injunction Act, a person challenging a tax assessment must first pay the tax and then ask for a refund. However, CIC’s challenge is not to any specific tax, but rather to a regulatory scheme requiring the disclosure of methods for reducing taxable income.
The question that the Supreme Court must consider is whether the Anti-Injunction Act’s bar on lawsuits for the purpose of restraining the assessment or collection of taxes extends to lawsuits designed to challenge regulations that concern taxes, but are not actually taxes themselves. There is currently a circuit split on this question, with the Sixth Circuit most recently ruling in favor of the IRS in this case, holding that the penalty triggered by failing to report a case was itself a tax, thus falling under the Anti-Injunction Act.
CIC Services is arguing that their lawsuit does not fit within text of the Anti-Injunction Act and that barring CIC’s suit would undermine the goals and requirements of the APA. See Brief for Petitioner at 16, 31, CIC Services, LLC v. IRS, No. 19-930 (U.S. filed July 15, 2020). The IRS is arguing that the CIC’s challenge represents a misreading of the statutory text and the Supreme Court’s precedent. See Brief for Respondent at 24, CIC Services, LLC v. IRS, No. 19-930 (U.S. filed Sept. 8, 2020). Multiple interested parties have filed amicus briefs in connection with the case, including the United States Chamber of Commerce, various taxpayer organizations, administrative law professors, and tax law practitioners.