Partnership Fights Dismissal of Case Seeking IRS Appeals Review

HANCOCK COUNTY LAND ACQUISITIONS, LLC, et al
Appellant/Defendant
v.
UNITED STATES OF AMERICA, et al
Appellees/Plaintiffs

IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION

Direct Appeal from Final Judgment,
Dist. Court # 1:20-CV-3096-AT

INITIAL BRIEF OF Appellants

ATTORNEY FOR APPELLANT HANCOCK COUNTY
LAND ACQUISITIONS, LLC ET AL:

Samuel Fenn Little, Jr.
Georgia Bar No. 454360
S. FENN LITTLE, JR., PC
1490 Mecaslin St NW
Atlanta, GA 30309
Tel: 404-815-3100

CERTIFICATE OF INTERESTED PERSONS

Pursuant to 11th Circuit R. 26.1-1, 26.1-3, and 27-1, it is hereby certified that the following persons and entities have an interest in the outcome of this case or have participated as attorneys or judges in the adjudication of this case:

STATEMENT REGARDING ORAL ARGUMENT

Appellants, pursuant to Federal Rule of Appellate Procedure 34 and Eleventh Circuit Rules 28-1(c) and 34(3)(c), respectfully request oral argument. Oral argument is warranted because this case deals with significant questions of the Court's jurisdiction. Specifically, whether the Anti-Injunction Act is so broad that it prohibits the judicial review of any Internal Revenue Service (“IRS”) action to collect or assess taxes, even those acts which expressly violate laws enacted by Congress for the stated purpose of codifying and protecting the due process rights of taxpayers subject to examinations by the IRS. The outcome of the case will significantly affect other taxpayers whose statutory right to due process have similarly been denied by the IRS, including at least one taxpayer who has filed a suit seeking rising the same legal and jurisdictional questions presented in this suit. Resolution of the issues raised in this suit would be facilitated if the Court had the opportunity to question the parties and hear elaboration on the briefing.

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TABLE OF CONTENTS

CERTIFICATE OF INTERESTED PERSONS

STATEMENT REGARDING ORAL ARGUMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF JURISDICTION

STATEMENT OF THE ISSUES

STATEMENT OF THE CASE

STANDARD OF REVIEW

SUMMARY OF ARGUMENT

ARGUMENT

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

CERTIFICATE OF SERVICE

TABLE OF AUTHORITIES

Cases

Abbott Laboratories v. Gardner, 387 US 136 (1967)

Bennett v. Spear, 520 U.S. 154 (1997)

Bowen v. Michigan Academy of Family Physicians, 476 US 667 (1986)

Brafman v. U.S., 384 F.2d 863 (1967)

Califano v. Sanders, 430 U.S. 99 (1977)

Calvert Anesthesia Assoc.-Pricha Phattiyakul, M.D., P.A., v. Comm'r, 110 T.C. 285 (1998)

CIC Services LLC v. IRS, 593 U.S. __, 2021 WL 1951782 (2021)

Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402 (1971)

Cohen v. United States, 650 F.3d 717 (D.C. Cir. 2011)

Comm'r v. McCoy, 484 U.S. 3 (1987)

Dep't of Commerce v. N.Y., 139 S. Ct. 2551, 2568 (2019)

Direct Marketing Association v. Brohl, 135 S.Ct. 1124 (2015)

Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962)

Facebook, Inc. v. IRS, 121 AFTR 2d 2018-1752, 2018 WL 2215743 (N.D. Cal. 1989)

Glover v. Liggett Group, Inc., 459 F.3d 1304 (11th Cir. 2006)

Greenberg's Express, Inc. v. Comm'r, 62 TC 324 (1974)

Hibbs v. Winn, 542 U.S. 88 (2004)

Lincoln v. Vigil, 508 US 182 (1993)

Martin v. Comm'r, 38 Fed. Appx. 980 (4th Cir. 2002)

Mobile Republican Assembly v. United States of America, 353 F.3d 1357 (11th Cir. 2003)

Naftel v. Comm'r, 85 T.C. 527 (1985)

Renfroe v. Nationstar Mortg., LLC, 822 F.3d 1241 (11th Cir. 2016)

Romano-Murphy v. Comm'r, 816 F.3d 707 (11th Cir. 2016)

Romano-Murphy v. Comm'r, 152 TC 278 (2019)

South Carolina v. Regan, 465 U.S. 367 (1984)

Timson v. Sampson, 518 F.3d 870 (11th Cir. 2008)

Weyerhaeuser Co. v. United States Fish and Wildlife Serv., 139 S.Ct. 361, 370, 202 L.Ed.2d 269 (2018)

Federal Statutes

5 U.S.C. § 701(a)(2)

5 U.S.C. § 702

5 U.S.C. § 703

5 U.S.C. § 704

5 U.S.C. § 706

26. U.S.C. § 170(h)

26. U.S.C. § 6501

26. U.S.C. § 7421(a)

26. U.S.C. § 7442

26. U.S.C. § 7803(e)*

26. U.S.C. § 7803(e)(4)

26. U.S.C. § 7803(e)(5)

26. U.S.C. § 7803(e)(5)(A)

26. U.S.C. § 7803(e)(5)(C)

Oher Authorities

65 Cong. Rec. H4363 (daily ed. June 10, 2019)

U.S. House, Committee on Ways and Means, Taxpayer First Act of 2019, H.R. Rep. No. 116-39 (April 9, 2019).

*Statutory Addendum attached hereto as Exhibit A, for the convenience of the Court.

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STATEMENT OF JURISDICTION

This is an appeal of the July 7, 2021 decision of the United States District Court for the Northern District of Georgia, which dismissed the Appellant's complaint. The District Court had subject matter jurisdiction over this action by virtue of 28 U.S.C. § 1331 (federal question); 28 U.S.C. § 2201 et seq. (Declaratory Judgement Act); and 28 U.S.C. §1361 (mandamus relief). This Court has jurisdiction under 28 U.S.C. § 1291. Venue of this appeal is proper in the Eleventh Circuit under 28 U.S.C. § 1294.

STATEMENT OF THE ISSUES

The primary question presented in the suit at issue is whether the IRS must comply with the laws as enacted by Congress, or whether the scope of the IRS' authority to enforce the provisions of the Internal Revenue Code (“Code”) is so broad that it exceeds the statutorily created mandates imposed by Congress and the constitutional norms of due process. More specifically, the question is whether the IRS can ignore Code § 7803(e)¹ in an effort to hastily issue an adverse determination that has the effect of denying taxpayers their statutorily created right to an independent appeal of the IRS' proposed determinations. In order to resolve that question the issues before the Court are:

Before wading into the technical details of this case, it may be helpful to step back and examine what the IRS argues it may do to taxpayers. First, despite Congressional action to codify taxpayers' rights, the IRS believes it can deny taxpayers right to independent appeal of the IRS' proposed determinations, because insufficient time remains to assess taxes. However, if the taxpayer consents to extend the time to assess taxes, the IRS can still deny the right to independent appeal and instead can issue a proposed determination that unless litigated becomes final, in direct contravention of Congress' intent to codify the right to independent appeal before costly litigation commences. Moreover, the IRS apparently contends that it need not comply with the very processes and procedures required by Congress to police any denial of independent review. That simply cannot be sustained, and the IRS must be reined in.

STATEMENT OF THE CASE

A. Procedural History

Hancock County Land Acquisitions, LLC (“Hancock”) is a Mississippi Limited Liability Company. In 2016 Hancock donated a conservation easement on property it owned in Mississippi. (Doc 32 – Pg. 2.) Hancock reported this donation on its 2016 partnership tax return. (Id.) In July of 2018, the IRS opened an examination into Hancock's 2016 partnership tax return, specifically the charitable contribution deduction for the conservation easement. (Id.)

With more than a year until the expiration of the statutory period for assessment and collection of taxes under Code § 6501, the IRS requested that Hancock extend the period for an additional 12 months. (Doc 22 – Pg. 17.) At that time, Hancock declined to extend the statute of limitations due to concerns about the cost of a lengthy examination explaining that it would consider signing an extension at a later date. (Doc 22 – Pg. 17.) In August 2019, the IRS informed Appellants, without explanation or reference to any published guidance, that in order to be sent to the Appeals Office a case must have 20 months remaining on the statute of limitations when closed by. (Doc 19 – Pg. 18.)

In April 2020, Hancock decided to extend the statute of limitations in order to avail itself of its right to review by the Independent Office of Appeals. (Doc 19 – Pg. 19.) To that end, Appellants submitted the signed Form 872-P agreeing to extend the statute of limitations to the IRS. However, after acknowledging receipt of the signed Form 872-P, the IRS refused to accept the statute extension and failed to countersign the Form 872-P. (Id.)

Instead, the IRS issued the summary report of the examination proposing certain adjustments to the Appellants' tax return. (Doc 19 – Pg. 23.) Additionally, the IRS informed Appellants that it was going to process the case and issue the Final Partnership Administrative Adjustment (”FPAA”) notice based solely on the agent's proposed adjustments, because the statute of limitations was going to expire on September 15, 2020. (Id.). Thus, by failing to countersign the Form 872-P that it had requested, the IRS violated the law by denying the taxpayers' right to have the proposed determination reviewed by the Independent Appeals Office prior to litigation as required by Code § 7803(e)(4). (Id.)

In an effort to protect their rights and compel the IRS to comply with the law, on July 25, 2020, the Appellants filed a complaint in the Northern District of Georgia. (Doc 1.) Unbeknownst to Appellants, the IRS issued the FPAA dated July 23, 2020 to Hancock's Tax Matter Partner. Appellants did not receive the FPAA prior to filing their suit. (Doc 32 – Pg. 5.)

On November 16, 2020, the Appellees filed a Motion to Dismiss for Lack of Jurisdiction. (Doc 15.) On December 7, 2020, the Appellants filed the First Amended Complaint. (Doc 19.)

On December 21, 2020, Appellees renewed their Motion to Dismiss the Amended Complaint. (Doc. 22.) In the Amended Complaint, Appellants' requested relief asks the Court to declare (1) that Appellants have a statutory right to the independent review of their case; (2) that IRS's refusal to grant that review was a violation of Appellants' rights; and that (3) the IRS is required to comply with legal requirements imposed by Code § 7803(e). (Doc 30 – Pg. 29.) The requested relief also asked the Court to compel the IRS to (1) countersign the Form 872-P; (2) provide Appellants review by the Independent Office of Appeals; (3) cease abusing Appellants' due process rights; (4) temporarily refrain from issuing an FPAA until such time as Appellants have been provided independent review; and (5) grant Appellants such other, further and additional relief as the Court deems just and proper. (Doc 30 – Pg. 29-30.)

On May 24, 2021, Appellees filed a Supplemental Brief in Support of the Motion to Dismiss based on the recent Supreme Court decision in CIC Services, LLC v. Internal Revenue Services, 593 U.S. __, 2021 WL 1951782 (May 17, 2021). (Doc 30.) On June 3, 2021, Appellants filed a response to the Supplemental Brief. (Doc 31.)

On July 7, 2021, the district court issued the order in this case granting the Appellees' Motion to Dismiss. (Doc. 32.)

B. Statement of Facts

a. Taxpayer First Act

In 2019, Congress passed, and the President signed into the Code the Taxpayer First Act of 2019 (“Taxpayer First Act”). (Doc 19 – Pg. 14.) As part of the Taxpayer First Act, Congress added § 7803(e)(4), creating a taxpayer “Right of Appeal” providing that the Independent Appeals process described in Code § 7803(e)(3) “shall be generally available to all taxpayers.” (Doc 19 – Pg. 14.)

The Taxpayer First Act addressed concerns about the IRS abuse of taxpayer rights in enforcement. As the act's co-sponsor Rep. Kevin Brady of Texas explained: “The Constitution guarantees Americans the right to due process and protection from unreasonable search and seizures. In the hearings led by Chairman Lewis and others, we have heard stories from across the country of the IRS abusing these rights. Under this bill, that stops . . . the Taxpayer First Act recasts the IRS as our tax administrator rather than simply an enforcement agency. We will better protect taxpayers from enforcement abuses by creating an impartial review of disputes they have with the IRS.” 165 Cong. Rec. H4363 (daily ed. June 10, 2019) (statement of Rep. Brady).

Congress noted that “the Code does not currently require that all taxpayers be provided an opportunity to contest an administrative decision in Appeals.” U.S. House, Committee on Ways and Means, Taxpayer First Act of 2019, H.R. Rep. No. 116-39 (2019) at 29 (April 9, 2019). (Doc 19 – Pg.15.) Recognizing the lack of a taxpayer right to an independent administrative appeal, Congress added Code § 7809(e)(4) explaining that “[t]he provision seeks to ensure that generally all taxpayers are able to access the administrative review process, allowing for their cases to be heard by an independent decision maker.” U.S. Senate, Committee on Finance, Legislative Summary of Taxpayer First Act of 2019. (Doc 19 – Pg. 15.)

b. Hancock's 2016 Return and the IRS Examination

By a Deed of Conservation Easement recorded on August 3, 2016, Appellants donated a conservation easement on property owned by Hancock County Land Acquisitions, LLC to a qualified tax-exempt public charity pursuant to Code § 170(h). (Doc 19 – Pg. 16.) Hancock reported the charitable deduction from the donation of a qualified conservation easement on their property. (Id.)

By a letter dated July 17, 2018, the IRS informed Appellants that the Form 1065 filed by Hancock for its tax period ended December 31, 2016 had been selected for examination. (Doc 19 – Pg. 16.) After commencing its examination of Hancock's return, the IRS determined that the statutory period for assessment and collection of taxes under Code § 6501 was set to expire on September 15, 2020. (Id.)

On or about May 29, 2019, the IRS requested that Hancock extend the statutory period for the assessment and collection of taxes for an additional 12 months or until September 30, 2021. (Doc 19 – Pg. 16.) The IRS reasoned that the additional time was necessary to develop and review all facts pertinent to the entity's charitable donation. (Doc 19 – Pg. 17.)

In June 2019, concerned about the duration and expense of the examination drawn out for over two more years, Hancock did not see the benefit of extending the statute of limitations at that time, and did not believe that an extension of the statute of limitations was necessary at that time as there were more than 15 months remaining on the statute of limitations. (Doc 19 – Pg. 17.) By a letter dated June 10, 2019, Hancock's legal counsel informed the IRS that: (a) Hancock was cooperating in the IRS examination in good faith; (b) Appellants were committed to participating in all administrative proceedings in a good faith effort to resolve any issues identified by the IRS Examination; and (c) Appellants were willing to extend the statutory period for the assessment and collection of taxes if such an extension were solely for the purpose of allowing the case to be reviewed by the IRS Appeals Office. (Id.)

By a fax dated August 12, 2019, the IRS sent Appellants' legal counsel a letter informing Appellants, without explanation or reference to any published guidance, that in order to be sent to the Appeals Office a case must have 20 months remaining on the statute of limitations when it is closed by the Examinations Division, and “[i]f the taxpayer does not agree to extend the statute, the case will be closed for issuance of the 'Final Partnership Administrative Assessment' (FPAA), which will preclude the taxpayer from going to Appeals.” (Doc 19 – Pg. 18.)

In April 2020, the Appellants revisited the IRS's request to extend the statutory period. Recognizing the significance and potential benefits of review by the Independent Office of Appeals, Appellants decided to sign the Form 872-P previously issued by the IRS extending the statutory period for the assessment and collection of taxes resulting from Hancock's tax year ended December 31, 2016, until September 15, 2021. (Doc 19 – Pg. 19.)

The letter sent by Appellants' legal counsel on April 3, 2020, explained that “we are taking the proactive step of enclosing as Exhibit 1 the executed Form 872-P extending the assessment-period by 18 months, until September 30, 2021. We request that you issue a Summary Report, Notice of Proposed Adjustments, Examination Report or the like, such that the Partnership can file a Protest Letter and address matters with the Appeals Office, before the IRS issues a notice of Final Partnership Administrative Adjustment ('FPAA”) and forces Tax Court litigation.” (Doc 19 – Pg. 20.)

The April 3, 2020 letter acknowledged the IRS's insistence of at least 20 months remaining before it would allow cases to be reviewed by the Appeals Office. In order meet this “requirement,” the letter further detailed that “[i]f you need to issue a revised Form 872-P further extending the assessment-period for 2016 to give the Appeals Office sufficient time, the Partnership would be glad to execute it.” [Emphasis added]. (Doc 19 – Pg. 20.)

Thus, Appellants signed the Form 872-P in an effort to fully exercise their rights, as provided by the Code, while also protecting the IRS's ability to assess and collect any potential tax deficiencies after the administrative due process required by Code § 7803(e)(4). (Doc 19 – Pg. 20.) Further, as Appellants submitted an executed Form 872-P to the IRS, Appellants did not, nor could they have, conditioned their execution of the Form 872-P on any subsequent condition to be imposed upon the IRS. (Doc 19 – Pg. 21.)

Almost a full month later, by a letter dated May 1, 2020, the IRS confirmed that it had received the letter and the executed Form 872-P extending the statute of limitations. (Doc 19 – Pg. 21.) However, the IRS explained that the it would not accept the Appellants' signed Form 872-P because, in August 2019, Appellants' legal counsel verbally informed the IRS that Hancock did not, at that time, intend to sign the Form 872-P. (Doc 19 – Pg. 21.) An additional concern raised in the letter dated May 1, 2020, was that the signed Form 872-P provided by the IRS only extended the statute of limitations for 18-months, which the IRS deemed was insufficient for the IRS Appeals Office to accept a case. (Doc 19 – Pg. 21-22.)

By a letter dated April 29, 2020, two days before the letter in which the IRS refused to accept the signed Form 872-P, the IRS stated that it had issued the summary report of the examination proposing certain adjustments to the Hancock's tax return, and due to the insufficient amount of time remaining on the statute of limitations, the IRS would not provide Appellants with the administrative review processes generally provided to taxpayers. (Doc 19 – Pg. 23.) Instead, the IRS would process the case and issue the FPAA notice based solely on Defendant-Appellee, Agent Stafford's proposed adjustments, thereby violating the law and denying the Appellants of their right to have the proposed determination reviewed by the Independent Appeals Office prior to litigation as provided in Code § 7803(e)(4). (Doc 19 – Pg. 22-23.)

The only reason provided in support of the IRS's unilateral decision to deny Appellants' their administrative rights to due process was the claim that, absent a signed Form 872-P, the statute of limitations was set to expire on September 15, 2020. (Doc 19 – Pg. 26.) However, the letter dated May 1, 2020, confirmed that on April 3, 2020, the IRS received the signed Form 872-P. (Doc 19 – Pg. 24.) Therefore, as of the date of the April 29, 2020 letter, the IRS had in its possession a signed Form 872-P which the IRS simply chose not to acknowledge or countersign. (Doc 19 – Pg. 24.) On April 29, 2020, the only reason the statutory period for assessment and collection would expire on September 15, 2020, and not September 30, 2021, was because the IRS unilaterally decided not to countersign the signed Form 872-P in its possession. (Id.)

c. District Court's Decision

On July 7, 2021, the district court issued an order granting Appellee's motion to dismiss. (Doc 32.) The district court found that suit was barred under the Anti-Injunction Act and the Declaratory Judgment Act, because the relief sought to restrain the assessment of taxes and no exceptions applied. The district court also held that the IRS's actions were not reviewable under the APA, because the IRS's actions were discretionary and were not final agency actions.

On July 21, 2021, Appellants filed a Notice of Appeal to this Court. (Doc 34.)

STANDARD OF REVIEW

This Court reviews an order granting a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure de novo, “'accepting the allegations in the complaint as true and construing them in the light most favorable to the plaintiff.'” Renfroe v. Nationstar Mortg., LLC, 822 F.3d 1241, 1243 (11^th Cir. 2016) (quoting Timson v. Sampson, 518 F.3d 870, 872 (11th Cir. 2008) (per curiam)). “[T]o survive a motion to dismiss, a complaint need only present sufficient facts, accepted as true, to 'state a claim to relief that is plausible on its face.'” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Eleventh Circuit reviews de novo questions of subject matter jurisdiction, including whether a complaint is barred by the Anti-Injunction Act. Dismissal for failure to state a claim is reviewed de novo. Glover v. Liggett Group, Inc., 459 F.3d 1304, 1308 (11th Cir. 2006).

SUMMARY OF ARGUMENT

By enacting the Taxpayer First Act, Congress explicitly created guardrails against IRS abuse and guaranteed taxpayers the right to administrative review by the Independent Office of Appeals. The issue before the Court is whether the courts have jurisdictional authority to enforce the laws enacted by Congress or whether Congress created a law which it knew and intended to be unenforceable by the courts due to the scope of the Anti-Injunction Act and the tax exception to the Declaratory Judgement Act. Appellants believe that Congress, by creating a statutory due process right access to an independent office of appeals within the IRS, bestowed up the courts the jurisdictional authority to review IRS actions that violate such rights and enforce the law as enacted by Congress.

The district court erred in dismissing the case because its analysis failed to focus on the IRS's violation of the law and the relief that Appellants sought from those actions. Instead the court focused on the underlying tax, which was not being challenged by the Appellants in this case. Appellants ask the Court to reaffirm the principle that “tax officials and taxpayers alike are under the law, not above it.” Brafman v. U.S., 384 F.2d 863 at 866 (1967).

Appellants do not seek to enjoin the assessment or collection of any tax, but rather ask the Court to enforce the laws enacted by Congress. The relief the Appellants seek does not involve any underlying tax liability, but instead focuses on unlawful IRS actions. In the Amended Complaint, Appellants' requested relief asks the Court to declare that: (1) they have a statutory right to the independent review of their case; (2) the IRS's refusal to grant that review was a violation of Appellants' rights; and (3) the IRS is required to comply with legal requirements imposed by Code § 7803(e). (Doc. 19 – Pg. 29.) The Appellants also asked the court to compel the IRS to (1) countersign the Form 872-P; (2) provide Appellants review by the Independent Office of Appeals; (3) cease abusing Appellants' due process rights; (4) temporarily refrain from issuing a FPAA until Appellants have been provided independent review, and (5) grant Appellants such other, further and additional relief as the Court deems just and proper. (Doc 30 – Pg. 29-30.)

Contrary to the IRS's position, the Anti-Injunction Act does not bar this suit. None of the relief requested seeks to restrain the assessment or collection of a tax.

Likewise, the Court can review the IRS's actions under the APA. Nothing in the law precludes the court from reviewing the IRS's violations of the law. To find so would completely undermine the Congressional intent to provide taxpayers the right to administrative appeals. When the IRS denied Appellants the right to review by Appeals, the IRS forever denied their due process rights codified by Congress. Such an action is a final agency action which is reviewable under the APA.

Here the IRS used its procedural powers to deny Appellants their rights under the law. In direct contravention of the law, the IRS denied the Appellants their right to administrative appeal. Courts must be allowed to review such violations of the law, because without such judicial oversight the laws enacted by Congress are meaningless. Congress intended to protect taxpayers from IRS overreach and abuse. Taxpayer First Act passed with full understanding of APA. If courts lack jurisdiction to enforce the laws, as the district court ruled, nothing can protect taxpayers from the IRS's continued abuse. The courts must be able to step in and force the IRS to comply with the law.

ARGUMENT

A. Neither the Anti-Injunction Act nor the Declaratory Judgment Act bar the suit

The district court erred when it determined that the Anti-Injunction Act barred the Appellants' suit, because (1) the requested relief does not restrain the assessment or collection of tax and (2) the facts fall within a narrow judicially defined exception.

The Anti-Injunction Act provides that “no suit for the purposes of restraining the assessment or collection of any tax shall be maintained in any court by any person.” 26 U.S.C § 7421(a). The purpose of the Anti-Injunction Act is “to permit the United States to assess and collect taxes alleged to be due without judicial intervention.” Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962). However, the term “assessment” is not “synonymous with the entire plan of taxation.” Hibbs v. Winn, 542 U.S. 88, 102 (2004). In other words, the Anti-Injunction Act was not designed to prevent every suit against the IRS which one day could potentially impact tax assessment or collection.

a. The relief sought does not restrain the assessment or collection of taxes

The district court erred when it determined that the requested relief ran afoul of the Anti-Injunction act, because the relief does not restrain the assessment or collection of taxes. In Direct Marketing Association v. Brohl, the Supreme Court explained that whether a suit is an attempt to “restrain” the assessment or collection of a tax depends on “whether the relief to some degree stops 'assessment, levy, or collection,' not whether it merely inhibits them.” Direct Marketing Association v. Brohl, 135 S.Ct. 1124, 1133 (2015). The Court went on to explain that “a suit cannot be understood to 'restrain' the 'assessment, levy or collection' of a state tax if it merely inhibits those activities.” Id. At 1129.

More recently in CIC Services LLC v. IRS, 593 U.S. __, 2021 WL 1951782 (2021), the Supreme Court held that challenges to unlawful IRS actions, rather than challenges of a specific tax liability, may fall outside the ambit of the Anti-Injunction Act. In CIC Services, the taxpayer challenged the lawfulness of the IRS's issuance of Notice 2016-66, not a specific tax liability at issue. Id. at 4. The taxpayer alleged that the Notice violated the APA, because (1) the IRS failed to follow the notice-and-comment procedures and (2) the Notice was arbitrary and capricious.

The Supreme Court found that “[t]hree aspects of the regulatory scheme . . . taken in combination, refute the idea that [the case was] a tax action in disguise.” CIC Services LLC v. IRS, 593 U.S. at 9. First, the Notice imposed substantial costs that are unconnected to any potential tax. Second, the causal chain between the Notices reporting requirements and any potential tax is attenuated. Third, the result of the Notice's reporting requirements necessitated a pre-enforcement suit, because a violation of the Notice not only resulted in a tax but also separate criminal penalties. Under the “the Anti-Injunction Act's familiar pay-now-sue-later procedure,” irreparable harm (criminal penalties) would attach prior to the ability to challenge the IRS's unlawful action. Thus, the facts “practically necessitate a pre-enforcement, rather than a refund, suit — if there is to be a suit at all.” 2021 WL 1951782 at *12.

Just as in CIC Services, here the three factors taken in combination show that the Appellants' suit targets the IRS's unlawful conduct, not the downstream tax. Appellants asked the court to declare that: (1) they have a statutory right to the independent review of their case; (2) the IRS's refusal to grant that review was a violation of Appellants' rights; and (3) the IRS is required to comply with legal requirements imposed by Code § 7803(e). (Doc. 19 – Pg. 29.) The Appellants also asked the court to compel the IRS to (1) countersign the Form 872-P; (2) provide Appellants review by the Independent Office of Appeals; (3) cease abusing Appellants' due process rights; (4) temporarily refrain from issuing an FPAA until Appellants have been provided independent review, and (5)grant Appellants such other, further and additional relief as the Court deems just and proper. (Doc 30 – Pg. 29-30.)

First, the IRS's denial of Appellants' right to review imposes added burdens that inflict additional and substantial costs that are separate from the tax. Congress established the Independent Office of Appeals to avoid costly litigation. By breaking the law and denying Appellants' an opportunity to resolve their case with the Independent Office of Appeals, the IRS has imposed additional and burdensome costs in litigating both this case and the Tax Court case challenging the FPAA. Appellants contest the legality of the IRS's violations of the law and seek relief from the burdens caused by such violations, not any potential tax. Any impact on the assessment or collection of tax is an “after-effect, not its substance.” CIC Services, 2021 WL 1951782 at *10.

Second, Appellants requested relief is several steps removed from the assessment or collection of taxes. Appellants do not seek to permanently enjoin the assessment of any tax; they simply seek to avail themselves of the Independent Office of Appeals review process that the IRS is legally obligated to provide prior to the assessment or collection of any tax. The request to enjoin the issuance of a FPAA requests such relief be temporary — only until such time as the IRS has complied with its statutory obligation to provide independent review. Thus, the requested relief does not “stop[ ] dead the process for assessing taxes,” rather it asks the Court to compel the IRS to engage in a “process for assessing taxes” that is compliant with its legal obligations as provided in Code § 7803(e), which requires that the process include access to review by the Independent Office of Appeals. (Doc 30 at 5.)

Finally, while Appellants are not forced to break the law and subject themselves to potential criminal liability as in CIC Services, the IRS's violations of the law “practically necessitate a pre-enforcement, rather than a refund, suit — if there is to be a suit at all.” 2021 WL 1951782 at *12. Here as in CIC Services “only an injunction against” the IRS's violations “gives the taxpayer . . . what it wants:” relief from those violations in the form of review by the Independent Office of Appeals. Id. A refund suit cannot put the proverbial cat back into the bag; Appellants would not receive administrative review by the Independent Office of Appeals. Instead Appellants would be forced to incur litigation costs to resolve the dispute, in direct contradiction of Congress's aim in creating a right to review by the Independent Office of Appeals. Just as in CIC Services, the requested relief can only be effectuated by this suit.

The legislative history explains that Congress implemented these laws to protect taxpayers from abuse by the IRS. Requiring the IRS to follow the laws that it is charged with enforcing — the specific relief that the Appellants requested in their Complaint — is merely an effort to protect their statutory right to due process, not be an attempt to “restrain” the assessment or collection of any tax for purpose of the Anti-Injunction Act. Any other finding would render the Congressionally mandated taxpayer protections meaningless and would render this law, as enacted by Congress and signed by the President, unenforceable by the courts.

In Direct Marketing Association v. Brohl, the Supreme Court explained that whether a suit is an attempt to “restrain” the assessment or collection of a tax depends on “whether the relief to some degree stops 'assessment, levy, or collection,' not whether it merely inhibits them.” Direct Marketing Association v. Brohl, 135 S.Ct. 1124, 1133 (2015). Stated another way “when there is 'too attenuated a chain of connection' between an upstream duty and a 'downstream tax,' a court should not view a suit challenging the duty as aiming to 'restrain the assessment or collection of a tax.'” CIC Serv., LLC v. IRS, 593 U.S. __, at 11 (2021) (quoting the Government's oral argument).

The narrow relief sought by the Appellants — that the IRS be enjoined from violating the law — does not “block[ ] the downstream [tax] that may” arise at the conclusion of the matter. CIC Serv., LLC v. IRS, 593 U.S. __ at 9 (2021). Rather, the Appellants contest the legality of the IRS' actions, not the legality of any potential tax. The requested relief merely instructs the IRS to follow the proper procedures mandated by Congress before an assessment can be made.

As the relief sought by Appellants is not prohibited by the Anti-Injunction Act, it cannot be prohibited by the tax exception to the Declaratory Judgment Act, which courts have determined to be coextensive and coterminous with the Anti-Injunction Act. Thus, an action allowed by one statute will not be barred by the other statute. See, e.g., Cohen v. United States, 650 F.3d 717, 727-31 (D.C. Cir. 2011) (en banc); Mobile Republican Assembly v. United States of America, 353 F.3d 1357, 1362 n.6 (11th Cir. 2003) (noting that “the federal tax exception to the Declaratory Judgment Act is at least as broad as the prohibition of the Anti-Injunction Act”).

b. Even if the Anti-Injunction Act applies, the suit qualifies for an exception

Even if the Anti-Injunction Act applies, this case falls within the very narrow judicial exception. The Supreme Court has recognized two limited judicial exceptions to the Anti-Injunction Act. First, only upon proof of the presence of two factors can the literal terms of Code § 7421(a) be avoided: (1) collection would cause irreparable harm, the essential prerequisite for injunctive relief in any case, and (2) certainty of success on the merits. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 6-7 (1962). Second, the Act does not apply to parties for whom Congress has not provided an alternative forum in which to litigate their claims. South Carolina v. Regan, 465 U.S. 367, 376 (1984). Though extremely narrow, if the Anti-Injunction Act is applicable in the present case the facts demonstrate that the judicial exception provided under Williams Packing & Navigation is applicable to the Appellants' Complaint.

In Williams Packing & Navigation, the court explained that “if it is clear that under no circumstances could the Government ultimately prevail, the central purpose of the [Anti-Injunction Act] is inapplicable and, under the Nut Margarine case, the attempted collection may be enjoined if equity jurisdiction otherwise exists.” Williams Packing & Navigation Co., 370 U.S. at 7.

The district court erred by completely dismissing the Appellants' argument on this exception in a footnote (Doc 32 – Pg. 10). The district court concluded that (1) it is not clear that the IRS cannot prevail and (2) there exists another remedy at law. However, both of these conclusions are demonstrably wrong. The district court gave no reasoning for its conclusion to the contrary that it was “by no means clear that the Government cannot prevail under any circumstances.” (Doc 32 at 10.)

First, the IRS' denial of independent review by the Appeals Office by issuing the FPAA violated the legal procedures provided in Code § 7803(e)(4). In the present situation, Congress enacted a law granting a “[r]ight of appeal” and required the IRS to provide such right to generally “all taxpayers,” but the IRS deliberately chose to violate the law and Appellants' rights by issuing the FPAA without providing the requisite access to appeals. An FPAA issued in violation of the law cannot be upheld. In light of the IRS' violation of Code § 7803(e)(4), the FPAA cannot be upheld and Appellants are certain to succeed on the merits of the case.

Appellants' position that an illegally issued FPAA is not enforceable is consistent with the case law in this Circuit. In Romano-Murphy v. Commissioner, the Eleventh Circuit Court of Appeals determined that the administrative appeals process established prior to Taxpayer First Act “entitled” the taxpayer to a determination on a written protest seeking an administrative appeal, and that the IRS erred in failing to provide the taxpayer with such an appeals conference, remanding the case to the Tax Court for a factual determination as to whether the IRS' error was harmless. Romano-Murphy v. Commissioner, 816 F.3d 707 (11^th Cir. 2016); see also, Romano-Murphy v. Commissioner, 152 TC 278 (2019) (the Service's assessment was invalid and unsustainable because the Service failed to follow its procedures with respect to the taxpayer's written protest appealing the Service's decision). Thus, under the Eleventh Circuit's interpretation under the law prior to the Taxpayer First Act, the Appellants would have been “entitled” to its appeals conference of right on the basis of the regulations that existed even before the Taxpayer First Act was enacted.

The IRS' act of issuing an FPAA without allowing Appellants access to an independent appeals process violated the law and denied the Appellants' due process rights created by Code § 7803(e)(4). Pursuant to Romano-Murphy, an FPAA issued in violation of the law is invalid and unsustainable. Thus, the FPAA that the IRS issued to the Appellants in this case is invalid and unsustainable because it was issued in violation of Code § 7803(e)(4). As the FPAA issued to Appellants in this case is invalid and unsustainable, the Government cannot prevail in any circumstance.

Moreover, the district court erred in determining that “another remedy at law exists in connection with Appellants' challenge to the FPAA, specifically through the Tax Court.” (Doc 32 – Pg. 10.) That remedy does not redress the IRS's denial of Appellants' rights to administrative review by the Independent Office of Appeals. The district court's focus on the Appellants' ability to challenge the determinations in the FPAA in the Tax Court illustrates a fundamental misunderstanding of the issue at hand. In this case, Appellants are not challenging the IRS's determinations or any tax liability resulting from the FPAA. Appellants are challenging the IRS's denial of their statutorily defined right to appeal the IRS's proposed determinations at the Independent Office of Appeal prior to litigation. More simply, here the Appellants are challenging the actions of the Service that violate the legal requirements imposed by Code § 7803(e), and not the potential tax which may result from such an illegal act.

Moreover, the specific narrow relief that the Appellants are seeking will only address the IRS' illegal actions, and in no way seek to reduce or eliminate any potential tax that may result from an administrative process that comports with legal requirements of the Code. Thus, the right or ability to challenge the amount of the tax liability resulting from an illegally issued FPAA in court does not provide an alternative remedy for challenging the illegal act which renders the FPAA invalid and unenforceable.

In addition to failing to address the issue of the illegal act which has given rise to this case, the Appellants' ability to challenge the amount of the deficiency may itself preclude the Appellants from ever being able to challenge or remedy the illegal act itself. As a general rule, the Tax Court “will not look behind a deficiency notice to examine the evidence used or the propriety of respondent's motives or of the administrative policy or procedure involved in making his determinations.” Greenberg's Express, Inc., 62 TC 324, 327 (1974). Further, even if the court was willing to look behind the notice, as a court of limited jurisdiction, it would lack jurisdictional authority to offer the Appellants a remedy.

The Tax Court only has jurisdiction over matters as conferred to it by statute. See, Code § 7442; and Naftel v. Comm'r, 85 T.C. 527, 529 (1985). Jurisdiction conferred on the Tax Court by Code § 7442 does not provide for review of issues under the APA or general federal question jurisdiction. The APA provides a generic cause of action and does not contain an implied grant of subject matter jurisdiction to review agency action. Califano V. Sanders, 430 U.S. 99, 107 (1977). As such, the Tax Court lacks general equitable powers. Comm'r v. McCoy, 484 U.S. 3 (1987); and Martin v. Comm'r, 38 Fed. Appx. 980 (4^th Cir. 2002). The Court has no authority to apply equitable principles to assume jurisdiction over a matter not authorized by statute. Calvert Anesthesia Assoc.-Pricha Phattiyakul, M.D., P.A., v. Comm'r, 110 T.C. 285, 287 (1998). Therefore, the Tax Court lacks the jurisdictional authority to address the issues raised in the Appellants' complaint, as such, the Court's review over such issues cannot infringe on the Tax Court's jurisdiction over the FPAA because such the issues, as a matter of law, cannot be considered by the Tax Court.

Thus, Appellants' ability to challenge the amount of the deficiency in Tax Court, as it has done in this case, cannot be construed as an alternative remedy for addressing and resolving the illegal act. First, the ability to challenge the potential tax liability resulting from the illegal act at issue does not offer an alternative method for addressing the illegal act itself. Second, the limited jurisdiction of the Tax Court — the only prepayment forum for addressing potential deficiencies resulting from the illegal act — precludes the court from actually considering the illegal act. Thus, the Appellants have no alternative remedies at law. The district court's fundamental misunderstanding of this issue itself requires that this case be remanded.

B. The IRS's actions are subject to judicial review under the APA

The APA provides a means for judicial review for persons who suffer legal wrong because of agency action or who have been adversely affected or aggrieved by an unlawful agency action and have no other legal method for challenging that unlawful action. 5 U.S.C. §§ 702-703. To obtain relief under the APA, the moving party must show (1) it suffered “a legal wrong because of an agency action,” (2) it is not seeking money damages, and (3) the relief sought is not forbidden by another statute. 5 U.S.C. § 702.

Here, Appellants have suffered a legal wrong due to the IRS' failure to comply with the legal requirements imposed by Code § 7803(e)(4). The Appellants are not seeking money damages. As explained above, the relief is not forbidden by another statute. Further, Appellants will suffer “a legal wrong because of agency action” because the IRS' issuance of the FPAA without providing review by the Independent Office of Appeals forever precludes the Appellants from availing itself of its administrative remedies prior to litigation.

The district court erred in determining that the APA provides for judicial review of the IRS's action here, because the actions were committed to agency discretion or were not final within the meaning of 5 U.S.C. § 704.

a. The IRS's actions are not precluded from judicial review under 5 U.C.S. § 701(a)

According to section 701(a)(2) of the APA, agency actions “committed to agency discretion by law” are not subject to the APA. However, the Supreme Court has consistently held that there is a strong presumption in favor of judicial review of agency action. Bowen v Michigan Academy of Family Physicians, 476 US 667, 670 (1986). See also Lincoln v Vigil, 508 US 182, 190 (1993) (recognizing a basic presumption of judicial review); Abbott Laboratories v Gardner, 387 US 136,140-41 (1967) (noting that judicial review of administrative actions is favored by the Supreme Court). In Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410 (1971), the Court emphasized that 5 U.S.C. § 701(a)(2) provides a “very narrow” exception to the presumptive reviewability of agency action under the APA.

Section 701(a)(2) must be read in conjunction with Section 706 of the APA, which gives courts the power to review agency actions for “abuse of discretion.” The Supreme Court has found that “[i]n order to give effect to the command that courts set aside agency action that is an abuse of discretion, and to honor the presumption of judicial review” courts must “read the § 701(a)(2) exception for action committed to agency discretion 'quite narrowly, restricting it to 'those rare circumstances where the relevant statute is drawn so that a court would have no meaningful standard against which to judge the agency's exercise of discretion.''” Dep't of Commerce v. N.Y., 139 S. Ct. 2551, 2568 (2019) (quoting Weyerhaeuser Co. v. United States Fish and Wildlife Serv., 139 S.Ct. 361, 370, 202 L.Ed.2d 269 (2018) (quoting Lincoln v. Vigil, 508 U.S. 182, 191, 113 S.Ct. 2024, 124 L.Ed.2d 101 (1993) ).

In Abbott Laboratories v. Gardner, 387 U.S. 136, 141 (1967), the Court stated that “only upon a showing of 'clear and convincing evidence' of a contrary legislative intent should courts restrict access to judicial review.” The Court later clarified that statutory language phrased in permissible terms was not clear and convincing evidence of congressional intent to limit review and instead inferred a right of judicial review in plaintiffs who are members of a class whose interests Congress intended to protect. Barlow v. Collins, 397 U.S. 159, 165-167 (1970) (the Court explained that “[t]he right of judicial review is ordinarily inferred where congressional intent to protect the interests of the class of which the plaintiff is a member can be found; in such cases, unless members of the protected class may have judicial review the statutory objectives might not be realized.”).

When denying administrative review by the Independent Office of Appeals, Code § 7803(e)(5)(A) requires the IRS to provide in writing a detailed description of the basis for the denial and describe the procedures for protesting the decision to deny the request. Code §7803(e)(5)(C) requires the IRS to “prescribe procedures for protesting to the Commissioner of Internal Revenue a denial” of a request for review by the Independent Appeals Office. In enacting these safeguards Congress intended “to restrict and provide oversight of the procedures and standards that the IRS must follow in denying requests for an independent administrative review.” H.R. Rep. No. 116-39 at 29-30.

Accordingly, the IRS' decision not to refer Hancock's case to the Independent Office of Appeals is subject to judicial review under the APA and not excluded under Section 701(a)(2) of the APA. First, there is no evidence of legislative intent to prevent judicial review of the IRS's actions. While the district court and Appellees focus heavily on the modifier “generally” rather than the directive “shall,” the legislative history illustrates that Congress intended to protect taxpayers from arbitrary actions by the IRS. Congress went so far as to require the IRS to detail in writing the basis of any denial. Second, as explained in the Supreme Court's decision Barlow, in the present situation, if courts lack the authority to review and enforce Code § 7803(e)(4), then the objectives of the statute will never be realized and, despite the existence of a law to the contrary, there will be no limit on ability of the IRS to arbitrarily violate and deny taxpayers the rights created by the Taxpayer First Act.

Thus, no evidence supports the district court's finding that Section 701(a)(2) of the APA bars judicial review, or put another way, nothing supports the court's imputed determination that Congress intended to create a law that had no possible method of enforcement by the courts. Code § 7803(e)(4) provides that taxpayers with the “right of appeal” stating that review by the Independent Office of Appeals “shall be generally available to all taxpayers.” While the IRS can under certain circumstances decline to refer cases, it must comply with standards and processes outlined by Congress in doing so. The IRS failed to do so here. Since the IRS failed to comply with Code §7803(e)(5), the IRS has abused its discretion.

b. The IRS's actions are final actions within the meaning of 5 U.S.C. §704

The Supreme Court has articulated two requirements for an agency's action to qualify as final. Bennett v. Spear, 520 U.S. 154, 177–78 (1997) First, the action may not be tentative or interlocutory in nature but must represent the “'consummation' of the agency's decisionmaking process.” Id. Second, it must be an action “by which 'rights or obligations have been determined,' or from which 'legal consequences will flow.'” Id.

The district court erred in concluding that “the refusal to refer Hancock's case to Appeals before the issuance of the FPAA was interlocutory in nature, not final.” (Doc 32 – Pg. 18.) The decision to deny review by Appeals was final, because it consummated the IRS's decision to cut off any pre-litigation administrative review, which was based at least in part on some arbitrary non-published “requirement” that 20 months must remain on the statute. Moreover, the decision adversely affects Appellants, because Appellants were denied their statutorily proscribed right of administrative review by the Independent Office Appeals prior to instituting litigation.

The district court erroneously relied upon Facebook, Inc. v. IRS in determining that the IRS's decision could not be reviewed under the APA. The district court correctly noted that “the Facebook decision was issued before the passage of the Taxpayer First Act.” (Doc 32 – Pg. 18-19 n. 11.) In Facebook, the court specifically determined that the decision not to refer Facebook's tax case to Appeals was not a final agency action, because the court determined the Code at the time did not provide an enforceable right to take its case to Appeals. Facebook v. IRS, 121 AFTR 2d 2018-1752, 2018 WL 2215743, at *13. In determining that Facebook did not have an enforceable right, the court held that the “Taxpayer Bill of Rights” did not create a new right. Id. at *22.

The enactment of the Taxpayer First Act and the “right to appeal” found in Code § 7803(e)(4) were in direct response to the Facebook case, i.e., Congress enacted Code § 7803(e) in light of a shortcoming in its intended application of the law identified by the Facebook case. Congress acknowledged that prior to the Taxpayer First Act “the Code does not currently require that all taxpayers be provided an opportunity to contest an administrative decision in Appeals.” H.R. Rept. 116-39 at 29. Congress believed it was “advisable to codify the role of an independent administrative appeals function within the IRS.” Id. Congress clarified that in “making access to Independent Appeals generally available to all taxpayers, the establishment of the new office clarifies the rights of taxpayers to review administrative case files and to protest denial of access to Independent Appeals.” H.R. Rept. 116-39 at 31. Thus, the Taxpayer First Act created new and enforceable rights for taxpayers, unlike the Taxpayer Bill of Rights considered by the court in Facebook.

In Facebook, the court's basis for concluding that there was no final agency action was predicated on the assumption that Facebook had no enforceable right to take its case to Appeals and that the IRS's decision not to refer its case to IRS Appeals foreclosed that right.” 2018 WL 2215743, at *30-31. However, after the Facebook decision was published, Congress changed the law to provide taxpayers with an enforceable right to an independent administrative appeals process. Thus, the court's reasoning in Facebook is no longer applicable. When the IRS denied Appellants the right to review by Appeals, the IRS forever denied their due process rights codified by Congress. Such an action is a final agency action which is reviewable under the APA.

C. The IRS cannot be allowed to unilaterally deny taxpayers their statutory rights

The district court's decision in effect gives the IRS carte blanche to trample taxpayer rights. In direct violation of clear requirements of Code § 7803(e)(4), the IRS has repeatedly abused its administrative authority and broken the law, by refusing to grant Appellants their right to have their case reviewed by the IRS Independent Appeals Office and by refusing to inform them of their rights regarding the protest of such a denial. The district court granted the Appellee's Motion to Dismiss on the assumption that the IRS's continued malfeasance made the suit moot.

Essentially, the district court said that since the IRS has already issued the FPAA, the relief sought by Appellees is moot. However, the IRS never should have issued the FPAA without first providing Appellants review by the Independent Appeals Office. Under that logic, no court will ever have the authority to require the IRS to adhere to the law, so long as the IRS violates the law quickly enough to do so before the taxpayer asks the Court to enjoin the IRS from violating the law. This logic essentially gives the IRS ability to violate, avoid, and evade the law at will, forever thwarting the efforts of Congress to create and protect the due process rights of taxpayers by foreclosing any judicial review of such violations. More specific to the Appellants in this case, if the FPAA is allowed stand, the IRS will be able to immediately assess a tax, forever depriving the Appellants of their right to an independent and impartial preassessment review of their administrative case outside of litigation — it is a harm that cannot be fixed, resulting from an abuse that cannot be remedied.

Conclusion

For the foregoing reasons, Appellants respectfully request that this Court reverse the district court's order and remand the case.

S. Fenn Little, Jr.
Attorney for
Plaintiffs/Appellants
GA Bar Number: 454360

FENN LITTLE, ESQ.
CONSERVATION DEFENSE GROUP, INC.
3522 Ashford Dunwoody Rd.
PMB 402
Brookhaven, GA 30319
Atlanta, GA 30309
Ph: 404-815-3100
Fax: 404-521-4029
fennlaw@fennlittle.com