Government Opposes Rehearing in Captive Insurance Reporting Case

CIC SERVICES, LLC,
Plaintiff-Appellant
v.
INTERNAL REVENUE SERVICE; DEPARTMENT OF TREASURY; UNITED STATES OF AMERICA,
Defendants-Appellees

IN THE UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

ON APPEAL FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE

APPELLEES' RESPONSE TO APPELLANT'S PETITION FOR REHEARING EN BANC

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

TERESA E. MCLAUGHLIN  (202) 514-4342
BETHANY B. HAUSER (202) 514-2830
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:

J. DOUGLAS OVERBEY
United States Attorney

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TABLE OF CONTENTS

Table of contents

Table of authorities

Introduction

Argument

Conclusion

Certificate of compliance

Certificate of service

TABLE OF AUTHORITIES

Cases:

Abbott Labs. v. Gardner, 387 U.S. 136 (1967)

Autocam Corp. v. Sebelius, 730 F.3d 618 (6th Cir. 2013), cert. granted, vacated and remanded sub nom. Autocam Corp. v. Burwell, 573 U.S. 956 (2014)

Avrahami v. Commissioner, 149 T.C. 144 (2017)

Bob Jones Univ. v. Simon, 416 U.S. 725 (1974)

Bull v. United States, 295 U.S. 247 (1935)

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

Dickens v. United States, 671 F.2d 969 (6th Cir. 1982)

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

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

Fla. Bankers Ass'n v. U.S. Dep't of Treasury, 799 F.3d 1065 (D.C. Cir. 2015)

Foodservice & Lodging Inst., Inc. v. Regan, 809 F.2d 842 (D.C. Cir. 1987)

Green Solution Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017)

Hill v. Marshall, 962 F.2d 1209 (6th Cir. 1992)

Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114 (10th Cir. 2013), aff'd, Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014)

Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013)

Los Angeles County v. Davis, 440 U.S. 625 (1979)

Mayo Found. for Med. Educ. & Research v. United States,  U.S. 44 (2011)

Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012)

Seven-Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011)

Thomas More Law Ctr. v. Obama, 651 F.3d 529 (6th Cir. 2011), abrogated in part by Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012)

Statutes:

Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq.

Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a)

Declaratory Judgment Act (DJA), 28 U.S.C. § 2201 et seq.

Internal Revenue Code (I.R.C.) (26 U.S.C.):

Patient Protection & Affordable Care Act (ACA), 42 U.S.C. § 18001 et seq.

Tax Injunction Act (TIA), 28 U.S.C. § 1341

Miscellaneous:

6 Cir. IOP 35(a)

Federal Rule of Appellate Procedure 35(b)(1)(B)

H.R. Rep. No. 94-1656 (1976)

IRS Notice 2016-66, 2016-47 I.R.B. 745

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INTRODUCTION

1. “[T]axes are the lifeblood of government, and their prompt and certain availability an imperious need.” Bull v. United States, 295 U.S. 247, 259 (1935). To “protect[ ]” this vital “stream of revenue,” Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 543 (2012) (NFIB), the Anti-Injunction Act (AIA) provides (with statutory exceptions not applicable here) that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” 26 U.S.C. (I.R.C.) § 7421(a).¹ “The [AIA] is equally applicable to activities which are intended to or may culminate in the assessment or collection of taxes.” Dickens v. United States, 671 F.2d 969, 971 (6th Cir. 1982) (citations omitted). “Because of the [AIA], taxes can ordinarily be challenged only after they are paid, by suing for a refund.” NFIB, 56 U.S. at 543.

Because the AIA is a “creature[ ] of Congress's own creation,” it applies to “statutorily described 'taxes' even where that label [is] inaccurate.” NFIB, 567 U.S. at 544; see also id. at 671 (Scalia, J., dissenting on other grounds) (“What qualifies as a tax for purposes of the [AIA] . . . is entirely within the control of Congress.”). As this Court held in Thomas More Law Ctr. v. Obama, 651 F.3d 529, 539 (6th Cir. 2011), abrogated in other part by NFIB, “some 'penalties' amount to 'taxes' for purposes of the [AIA].” These include penalties for failure to pay and other penalties “related to the enforcement of traditional taxes” located in Subchapter 68B of the Internal Revenue Code (I.R.C. §§ 6671-6720C). Id. “[A]ny reference in this title to 'tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter [68B].” I.R.C. § 6671(a). “Penalties in Subchapter 68B are thus treated as taxes under Title 26, which includes the [AIA].” NFIB, 567 U.S. at 544-45; Thomas More, 651 F.3d at 539 (collecting cases). “We know that” a Subchapter 68B penalty is “treated as a tax for purposes of the Anti-Injunction Act . . . for two good reasons: The text of the Tax Code says so, and the Supreme Court says so.” Fla. Bankers Ass'n v. U.S. Dep't of Treasury, 799 F.3d 1065, 1068 (D.C. Cir. 2015) (Kavanaugh, J.).

2. Micro-captive transactions are complex insurance schemes that, as CIC's principal admitted on cross-examination below, can “most definitely” be used for tax evasion or avoidance purposes. Transcript, RE No. 41, Page ID #645. See Avrahami v. Commissioner, 149 T.C. 144 (2017). In Notice 2016-66, 2016-47 I.R.B. 745, the IRS designated micro-captive transactions as “transactions of interest.” As a result, “material advisors” aiding taxpayers in such transactions became subject to reporting requirements (I.R.C. §§ 6111, 6112) enforced by penalties (I.R.C. §§ 6707, 6707A and 6708) found in Subchapter 68B.

3. CIC brought suit under the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq., seeking to enjoin enforcement of the Notice. Following the reasoning of NFIB and Florida Bankers, the District Court held that the suit was barred by the AIA² and dismissed the case for lack of subject matter jurisdiction.³

A divided panel of this Court affirmed. The majority held that CIC's suit fell within the purview of the AIA. Add. 5-14. It rejected CIC's contention that its suit was permitted under Direct Marketing v. Brohl, 135 S. Ct. 1124 (2015), where a different statute — the Tax Injunction Act (TIA), 28 U.S.C. § 1341 — did not bar a challenge to a state enforcement scheme that required retailers to report sales on which they did not collect sales and use taxes or else pay a penalty. The majority agreed with the D.C. Circuit in Fla. Bankers that Direct Marketing is distinguish-able because the penalty there was not itself a “tax,” as the penalties here were statutorily deemed, and because enjoining the Notice would necessarily preclude the assessment and collection of those tax penalties. Add. 8-11.

The majority also declined CIC's invitation to read Direct Marketing as having silently overruled this Court's rule (in Dickens) that the AIA applies broadly. It noted that the Tenth Circuit, which has adopted the identical reading of the AIA, rejected such a construction in Green Solution Retail, Inc. v. United States, 855 F.3d 1111, 1118 (10th Cir. 2017). Add. 11 n.6.

The majority also rejected CIC's argument that it sought to enjoin the report-ing requirement, rather than the enforcing penalty. It noted that in Autocam Corp. v. Sebelius, 730 F.3d 618, 622 (6th Cir. 2013), cert. granted, vacated and remanded sub nom. Autocam Corp. v. Burwell, 573 U.S. 956 (2014), a panel of the Court had “seemed prepared to recognize the distinction urged by” CIC, but the majority disregarded that opinion as not precedential and not persuasive. Add. 13.

Judge Nalbandian dissented. Conceding that “at some level of abstraction,” this case “could” fall within the terms of the AIA, and that “it is plausible that CIC's challenge could eventually hinder the assessment and collection of taxes” (Add. 16), he nevertheless assumed (without discussing this Court's precedent or the Tenth Circuit's opinion in Green Solution), that the interpretation of the TIA in Direct Marketing applied to the AIA. The dissent also reasoned that the penalty enforcing the reporting requirement flows not “from the requirement per se,” but from the “violat[ion] of the requirement.” Add. 19.

ARGUMENT

Contrary to CIC's assertion (Pet. 9 n.3), the panel's decision meets none of the standards for en banc review. See FRAP 35(b)(1)(B); 6 Cir. IOP 35(a).

A. The panel opinion does not conflict with the Supreme Court's decision in Direct Marketing, this Court's precedent or the decisions of other courts of appeals

The panel decision does not conflict (Pet. 7) with the Supreme Court's decision in Direct Marketing. This case concerns the AIA, I.R.C. § 7421(a), which bars a “suit for the purpose of restraining the assessment or collection of any tax,” while Direct Marketing interpreted the TIA, 28 U.S.C. § 1341, which bars federal suits to “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” Far from being a “technical[ ]” distinction (Pet. 8 n.2), the textual differences between the TIA and the AIA make much of the reasoning in Direct Marketing inapplicable here. For example, the Court, reading the TIA as speaking the language of equity, interpreted the word “restrain” narrowly, giving weight to the nearby words “enjoin” and “suspend,” 135 S. Ct. at 1132, which do not appear in the AIA. The Court also suggested that the word “restrain,” standing alone (as does the gerund in the AIA), could have a stronger meaning, including “merely inhibit.” Id. The Court also relied on the TIA's roots in the comity between State and federal courts, id. at 1132-33, which has no bearing upon whether a federal court may enjoin federal taxes. For such reasons, the only appellate court to address the issue has held that Direct Marketing is not applicable to the AIA. Green Solution, 855 F.3d at 1118. At all events, Direct Marketing is distinguishable: the penalty there was not considered a tax.

Nor does the panel's decision conflict with this Court's binding precedent. Pet. 12. As the panel majority noted (Add. 13), Autocam was vacated and remanded by the Supreme Court and is therefore no longer precedential. Hill v. Marshall, 962 F.2d 1209, 1213 (6th Cir. 1992). CIC's reliance on out-of-circuit precedent for the dubious proposition that a vacated decision continues to have precedential weight (Pet. 11) is misplaced. Los Angeles County v. Davis, 440 U.S. 625, 634 n.6 (1979) (citation omitted) (“Of necessity our decision 'vacating the judgment of the Court of Appeals deprives that court's opinion of precedential effect. . . .”). At all events, insofar as Autocam seemed to accept the proposition that the challenge to a requirement can be divorced from a challenge to the resulting penalty, the panel correctly found it unpersuasive. CIC seeks an order allowing it not to report a transaction, but without paying penalties for that failure that are “taxes” under I.R.C. § 6671(a), which clearly triggers the AIA. As the D.C. Circuit said in rejecting the same argument, “[t]he [AIA] cannot be sidestepped by such nifty wordplay.” Fla. Bankers, 799 F.3d at 1070.

Further, Autocam is distinguishable. That case, as well as Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114, 1127 (10th Cir. 2013), aff'd, Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014), and Korte v. Sebelius, 735 F.3d 654, 669 (7th Cir. 2013), upon which CIC also relies (Pet. 11-13), involved the contraceptive-coverage mandate adopted under the Affordable Care Act, not a tax penalty under Subchapter 68B. Due to the unique structure of the statutory scheme, the government conceded that the AIA did not apply, because the contraceptive-coverage mandate involved a freestanding legal obligation, not just a predicate to the tax on noncompliance imposed by I.R.C. § 4980D. The mandate flowed from delegated authority that existed outside the Treasury Department, 42 U.S.C. § 300gg-13(a), was independently enforced without the tax code, 42 U.S.C. § 300gg-22, and was subject to a preenforcement challenge by insurers.⁴

Also distinguishable are earlier D.C. Circuit cases cited by CIC. Pet. 13 n.4. The court allowed a preenforcement challenge to a Treasury Regulation that “[o]n its face” did “not relate to the assessment or collection of taxes,” but to IRS efforts, in undertaking a Congressionally mandated study, to determine the extent of tip compliance in the restaurant industry. Foodservice & Lodging Inst., Inc. v. Regan, 809 F.2d 842, 846 & n.10 (D.C. Cir. 1987) (per curiam). Another case, which was “sui generis,” involved a post-payment challenge to a method of refunding a conceded tax that was adopted without notice and comment. Cohen v. United States, 650 F.3d 717, 725-27, 733 (D.C. Cir. 2011) (en banc). A third concluded, as the Supreme Court would agree in NFIB, that the I.R.C. § 5000A penalty was not a “tax” subject to the AIA. Seven-Sky v. Holder, 661 F.3d 1, 14 (D.C. Cir. 2011). See Fla. Bankers, 799 F.3d at 1072 n.3; id. at 1072 (Randolph, J., concurring).

Viewed in this light, CIC's broader policy concerns (Pet. 14) are overstated. The majority's holding that preenforcement challenges to Subchapter 68B tax penalties are barred by the AIA is grounded in the plain text of I.R.C. §§ 6671(a), 7421(a) and NFIB, 567 U.S. at 544-45. It reflects the Congressional judgment to confine challenges to such penalties to suits for refund. As even the dissent recognized (Add. 16), tax penalties like the ones here exist precisely because reluctance to comply with reporting requirements itself undermines tax revenues.

CIC argues (Pet. 15) that a refund suit is an inadequate alternative because failure to report could subject it to consequences beyond the §§ 6707 and 6708 penalties, such as a criminal sanction under I.R.C. § 7203 for a willful violation. It is not clear, however, whether such a sanction could properly be imposed on a material advisor who demonstrates a good-faith intent to submit its challenge for judicial resolution. In any event, Congress may still preclude preenforcement review where regulations impose serious penalties for noncompliance, Abbott Labs. v. Gardner, 387 U.S. 136, 139 (1967), as it has done in enacting the AIA.

Also misplaced are CIC's general concerns about administrative law. The AIA is an exception to the APA and one expressly contemplated by Congress. See, e.g., H.R. Rep. No. 94-1656, at 12 & n.35 (1976) (the AIA bars jurisdiction under 5 U.S.C. § 702); id. at 27 (“Exhibit C”) (letter of then-Assistant Attorney General Antonin Scalia, advocating this result). Likewise, cases construing the DJA, 28 U.S.C. § 2201, such as Abbott Labs. (Pet. 1), have no bearing upon cases Congress has expressly excepted from the DJA (see p.1 n.1).⁵ At bottom, tax enforcement cases, including cases involving Subchapter 68B penalties, are different from the administrative law cases CIC cites because Congress chose to treat them differently. This case, like Florida Bankers, is no “anomal[y].” Pet. 10. Both are mine-run tax-penalty cases under Subchapter 68B. This Court and the Supreme Court have held that the AIA bars preenforcement suits in this context.⁶

There are, moreover, countervailing policy concerns. The reasoning advocated by the dissent (Add. 19, 23) is broadly applicable to tax penalties. As this Court has observed, without the bar of the AIA, “the recalcitrant tax protester could sue to preempt collection of a substantial monetary charge.” Thomas More, 651 F.3d at 539. The balance between preenforcement judicial review and efficient enforcement of tax laws is for Congress to strike. In the case of Subchapter 68B penalties, it struck that balance in favor of enforcement.

B. Adopting CIC's position would place this Court in conflict with the Tenth and D.C. Circuits

As we have shown, the decision of the panel majority creates no conflict. By contrast, the position advocated by CIC and the dissent would place this Court in conflict with both the D.C. Circuit and the Tenth Circuit. CIC acknowledges that it is asking this Court to go into conflict with the D.C. Circuit, at least implicitly, when it calls the opinion in Fla. Bankers “wrong.” Pet. 3. CIC does not even mention the Tenth Circuit's decision in Green Solution. To the contrary, by falsely suggesting that “all agree” that Direct Marketing applies here (Pet. 2), it seems to invite this Court unknowingly to go into conflict with that case. As the panel majority noted, by following the reasoning of Fla. Bankers, it was able to avoid resolving the Green Solution issue here. Add. 11. To adopt CIC's reading of the AIA, and to apply it here, would create a conflict with both decisions. This Court should not go en banc to create two new and unwarranted conflicts.

CONCLUSION

The petition for rehearing en banc should be denied.

Respectfully submitted,

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

TRAVIS A. GREAVES
Deputy Assistant Attorney General

TERESA E. MCLAUGHLIN (202) 514-4342
BETHANY B. HAUSER (202) 514-2830
Attorneys
Tax Division
Department of Justice
Post Office Box 502
Washington, D.C. 20044

Of Counsel:

J. DOUGLAS OVERBEY
United States Attorney

JULY 2019