Government Maintains Anti-Injunction Act Bars Notice Challenge 

GOVIG & ASSOCS., INC, et al.,
Plaintiffs,
v.
UNITED STATES OF AMERICA, et al.,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ARIZONA

UNITED STATES' REPLY IN SUPPORT OF MOTION TO DISMISS

Oral Argument Requested

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

CHARLES J. BUTLER
E. CARMEN RAMIREZ
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
Telephone:202-514-6062
Facsimile:202-307-0054
Email:Charles.J.Butler@usdoj.gov

MICHAEL BAILEY
United States Attorney
Of Counsel

Attorneys for United States

The United States of America replies to the plaintiffs' opposition to its motion to dismiss this action pursuant to Fed. R. Civ. P. 12(b)(1).

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TABLE OF CONTENTS

INTRODUCTION

ARGUMENT

I. The AIA Bars this Action.

A. This action would affect a “tax” for AIA purposes.

B. The plaintiffs' reliance on Direct Marketing is misplaced.

C.  he plaintiffs mischaracterize law and facts in further attempts to distinguish or undermine CIC Services and Florida Bankers

II. Neither Exception to the AIA Applies.

A. The South Carolina exception does not apply.

B. The Williams Packing exception does not apply.

CONCLUSION

TABLE OF AUTHORITIES

Federal Cases

Abbott Labs. v. Gardner, 387 U.S. 136, 152-53 (1967))

Bob Jones Univ. v. Simon, 416 U.S. 724 (1974)

Brennan v. Southwest Airlines Co., 134 F.3d 1405, 1409 (9th Cir. 1998)

Blech v. United States, 595 F.2d 462, 466 (9th Cir. 1979) 

CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh'g en banc denied, 936 F.3d 501 (6th Cir. 2019), petition for cert. filed (Jan. 24, 2020) (No. 19-930)

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

Dickens v. United States, 671 F.2d 969, 971 (6th Cir. 1982)

Direct Marketing Ass'n v. Brohl, 575 U.S. 1 (2015)

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

Florida Bankers Ass'n v. U.S. Dep't of the Treas., 799 F.3d 1065, 1068 (D.C. Cir. 2015), cert. denied, 136 S. Ct. 2429 (2016)

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

Himple v. Bank of Am., N.A., 2018 U.S. Dist. LEXIS 227422 (C.D. Cal. July 2, 2018)

Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114 (10th Cir. 2013)

Int'l Lotto Fund v. Virginia State Lottery Dep't, 20 F.3d 589, 591 (4th Cir. 1994))

Interior Glass Sys. v. United States, 927 F.3d 1081, 1086-87 (9th Cir. 2019)

Judicial Watch, Inc. v. Rossotti, 317 F.3d 401, 405 (4th Cir.), cert. denied, 540 U.S. 825 (2003) 

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

Larson v. United States, 888 F.3d 578, 586 (2d Cir. 2018)

Lowrie v. United States, 824 F.2d 827, 830 (10th Cir. 1987)

Maze v. IRS, 862 F.3d 1087 (D.C. Cir. 2017)

Nat'l Fed'n of Indep. Bus. v. Sebelius

Oklevueha Native Am. Church of Hawaii, Inc. v. Holder, 676 F.3d 829, 835 (9th Cir. 2012)

RYO Machine, LLC v. U.S. Dep't of Treas., 696 F.3d 467, 471 (6th Cir. 2012)

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

United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 10 (2008)

Federal Statutes

26 U.S.C. § 6532(a)(1)

26 U.S.C. § 6671 (a) 

26 U.S.C. § 6707A

26 U.S.C. § 7422

26 U.S.C. §§ 4980D and 4980H9

Federal Regulations

26 C.F.R. § 1.6011-4(d)

26 C.F.R. § 301.6402-2

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INTRODUCTION

In this challenge to IRS Notice 2007-83, the plaintiffs seek to eliminate a reporting requirement for potentially abusive tax transactions, as well as the penalty for failing to comply with that requirement, both of which Congress has imposed. Yet the plaintiffs also seek to avoid the procedure Congress has established for bringing such challenges. On this motion to dismiss, therefore, the issue before the Court is not whether the plaintiffs can obtain judicial review of their challenge to the Notice. The issue is whether the plaintiffs, to obtain such review, must follow the congressionally mandated procedure. In arguing that they need not do so, the plaintiffs ignore or mischaracterize key aspects of cases and facts, including facts they pled in their complaint. An accurate reading of the law and facts makes clear why this Court lacks jurisdiction: first, the Anti-Injunction Act (“AIA”) bars this action because it would impair the assessment of what Congress defines as a tax; and second, a procedurally sound action under 26 U.S.C. § 7422 is an adequate, and the appropriate, means to obtain the relief sought.

In arguing that the AIA does not apply, the plaintiffs ignore that the relief they seek would eliminate the IRS's ability to assess or collect what Congress has defined as a “tax” subject to the AIA. Analyzing circumstances similar to those here, two courts of appeal reached this conclusion regarding the relief sought in those actions, and thus held that the AIA barred them. See CIC Servs., LLC v. IRS, 925 F.3d 247, 254 (6th Cir. 2019), reh'g en banc denied, 936 F.3d 501 (6th Cir. 2019), petition for cert. filed (Jan. 24, 2020) (No. 19-930); Florida Bankers Ass'n v. U.S. Dep't of the Treas., 799 F.3d 1065, 1068 (D.C. Cir. 2015), cert. denied, 136 S. Ct. 2429 (2016). For that reason, the plaintiffs attempt to undermine the decisions in CIC Services and Florida Bankers, asserting that they conflict with Direct Marketing Ass'n v. Brohl, 575 U.S. 1 (2015). But the plaintiffs ignore that Direct Marketing did not involve a “tax” subject to the AIA. Likewise, while acknowledging that the statute at issue in Direct Marketing was the Tax Injunction Act, not the AIA, the plaintiffs fail to address critical differences between the two.

The plaintiffs further attempt to undermine CIC Services and Florida Bankers by asserting the following: (1) these decisions do not apply the purportedly proper AIA standard in Cohen v. United States, 650 F.3d 717 (D.C. Cir. 2011); (2) these decisions conflict with those in Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013), and Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114 (10th Cir. 2013), creating a “circuit split”; and (3) CIC Services and Florida Bankers did not involve forms of “other disclosures” to the IRS, as this action supposedly does. As explained below, in making these assertions, the plaintiffs misstate both relevant law and facts. None of these attempts at undermining or distinguishing CIC Services and Florida Bankers detracts from their force or relevance.

The plaintiffs likewise mischaracterize or ignore facts and law in arguing that the judicial exceptions to the AIA, regarding lack of an alternative means of relief and certainty of success on the merits, apply here. On the first exception, under South Carolina v. Regan, 465 U.S. 367 (1984), the plaintiffs do not deny that they can obtain the relief sought through a § 7422 action. Instead, they argue that pursuing such an action would be too burdensome. Yet burdensome or not, the procedure for pursuing a refund action is mandated by Congress. Moreover, in Interior Glass Sys. v. United States, 927 F.3d 1081 (9th Cir. 2019), the Ninth Circuit held, with respect to a challenge involving Notice 2007-83, that taxpayers must follow this procedure. And in any event, the plaintiffs have not faced the supposed burdens they describe, including any threat of criminal liability, but actually have put themselves in a posture to bring a § 7422 action.

Regarding the second exception, under Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1 (1962), the plaintiffs assert that no circumstance exists in which the United States could prevail against their claim that Notice 2007-83 should have gone through notice and comment. First, however, because a § 7422 action is available to them, this exception does not apply. Second, the plaintiffs ignore the history and purpose of the statute through which Congress accepted and strengthened the regulatory scheme behind the Notice. Given this history, the plaintiffs cannot meet their burden of showing certainty of success on the merits. For this additional reason, the second exception does not apply.

As explained more below, therefore, the plaintiffs have failed to counter that the AIA bars this action and that neither exception to the AIA applies. The plaintiffs thus have failed to state any basis on which this Court has jurisdiction.

ARGUMENT

I. The AIA Bars this Action.

A. This action would affect a “tax” for AIA purposes.

In their opposition, the plaintiffs repeatedly assert that the relief they seek — eliminating the listed transaction reporting requirement associated with Notice 2007-83 — has “nothing to do with” the assessment or collection of taxes. They ignore, however, that obtaining such relief would eliminate the IRS's ability to assess or collect the penalty imposed by Congress, under 26 U.S.C. § 6707A, for failing to comply with the reporting requirement with respect to those transactions. As explained in the opening brief, the §6707A penalty is a “tax” within the meaning of the AIA. Section 6671(a) of the Internal Revenue Code states that, unless otherwise provided, “any 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.” Given that (1) § 6671 falls under subchapter 68B of Title 26 (the Internal Revenue Code); (2) § 6707A also falls under subchapter 68B; and (3) the AIA, like subchapter 68B, is codified in Title 26, the § 6707A penalties are “taxes” for purposes of the AIA. See Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 544-45 (2012) (subchapter 68B penalties are “treated as taxes under Title 26, which includes the Anti-Injunction Act”).

For this reason, the only courts of appeal that have addressed challenges to IRS reporting requirements similar to that here have held that the AIA bars the challenge. In CIC Services, the Sixth Circuit addressed a challenge to IRS Notice 2016-66, which designates certain captive insurance arrangements as reportable transactions. Holding that the AIA bars the challenge, the court stated, “Plaintiff's suit seeks to invalidate the Notice, which is the entire basis for that tax [i.e., the penalty for failing to comply with the associated reporting requirement]. If successful, Plaintiff's suit would restrain (indeed eliminate) it.” 925 F.3d at 255 (internal quotes omitted). And in Florida Bankers, the D.C. Circuit addressed a challenge to a requirement that banks report interest paid to certain non-resident aliens. Holding that the AIA bars the challenge, the court stated, “Here, because the Code defines the penalty [for failure to report under §6721] as a tax, a tax is imposed as a direct consequence of violating the regulation. Invalidating the regulation would directly bar collection of that tax.” 799 F.3d at 1069.

It makes no difference that the plaintiffs contend the purpose of their suit is to challenge a regulatory requirement, not a tax. As the courts in both CIC Services and Florida Bankers emphasized, “[a]ny distinction that once existed in the Supreme Court's AIA jurisprudence between 'regulatory' taxes and 'revenue-raising' taxes appears to have been 'abandoned.'” CIC Servs., 925 F.3d at 256 (quoting Florida Bankers, 799 F.3d at 1070). In Bob Jones Univ. v. Simon, for instance, the Supreme Court held that where the relief sought would “necessarily preclude” the assessment or collection of taxes, the suit “falls squarely within the literal scope” of the AIA, regardless of how the challenge is characterized. 416 U.S. 724, 731 (1974); see also RYO Machine, LLC v. U.S. Dep't of Treas., 696 F.3d 467, 471 (6th Cir. 2012) (“Regardless of how the claim is labeled, the effect of an injunction here is to interfere with the assessment or collection of a tax. The plaintiff is not free to define the relief it seeks in terms permitted by the [AIA] while ignoring the ultimate deleterious effect such relief would have on the Government's taxing ability.”) (quoting Int'l Lotto Fund v. Virginia State Lottery Dep't, 20 F.3d 589, 591 (4th Cir. 1994)).

While the plaintiffs purport to challenge only a reporting requirement, they cannot ignore the impact the relief sought would have on the assessment and collection of tax, which implicates the AIA. As the court in Florida Bankers stated, “plaintiffs cannot evade the [AIA] by purporting to challenge only the regulatory aspect of a regulatory tax.” 799 F.3d at 1070.

B. The plaintiffs' reliance on Direct Marketing is misplaced.

Given that the decisions in CIC Services and Florida Bankers are directly on point, the plaintiffs attempt to undermine those decisions by contending, in reliance on Judge Nalbandian's dissent in CIC Services, that they conflict with Direct Marketing Ass'n v. Brohl, 575 U.S. 1 (2015). But for the reasons stated in the opening brief, and expanded on below, no conflict exists. First, unlike CIC Services and Florida Bankers (and this action), Direct Marketing did not involve what Congress has defined as a “tax” for AIA purposes. Second, Direct Marketing dealt with the Tax Injunction Act (“TIA”), which differs in important respects from the AIA.

In Direct Marketing, no party contended that the penalty Colorado used to enforce the reporting requirements at issue there was itself a “tax” within the meaning of the TIA. See Florida Bankers, 799 F.3d at 1069 (stating that “it was never argued or suggested that the penalty in [Direct Marketing] was itself a tax”). By contrast, in Florida Bankers, CIC Services, and this case, as discussed above, the penalty through which Congress enforces the reporting requirements is a “tax” within the meaning of the AIA. Because the actions in Florida Bankers and CIC Services, if successful, would have prevented collection of that tax, Florida Bankers and CIC Services correctly held that Direct Marketing did not control. For the same reason, Direct Marketing does not control in this action.

In addition, the AIA, which is the statute at issue in CIC Services, Florida Bankers, and this action, differs from the TIA, the statute at issue in Direct Marketing. Courts of appeal uniformly have held that the AIA “is equally applicable” to challenges directed at “the actual assessment or collection of a tax” as well as those directed at “activities leading up to, and culminating in, such assessment and collection.” Lowrie v. United States, 824 F.2d 827, 830 (10th Cir. 1987); see, e.g., Blech v. United States, 595 F.2d 462, 466 (9th Cir. 1979); Judicial Watch, Inc. v. Rossotti, 317 F.3d 401, 405 (4th Cir.), cert. denied, 540 U.S. 825 (2003); Dickens v. United States, 671 F.2d 969, 971 (6th Case 2:19-cv-05185-SMBDocument 28Filed 03/11/20Page 10 of 21 Cir. 1982). This reading of the AIA gives it a broader reach than what the Court in Direct Marketing saw in the TIA.

Moreover, as the Tenth Circuit recognized in Green Solution Retail, Inc. v. United States, 855 F.3d 1111, 1119-20 (10th Cir. 2017), differences in the TIA's and the AIA's statutory language indicate that Direct Marketing should not be viewed as implicitly overruling this longstanding body of AIA case law. The Court in Direct Marketing emphasized that its interpretation of the TIA depended on the statute's language, including the TIA's use of the words “enjoin, suspend or restrain” together, as “terms of art . . . that restrict or stop official action.” 575 U.S. at 13.¹ The Court explained that the reporting requirements at issue were intended merely to “improve [the] State's ability to assess and collect taxes” from third parties “at some future point,” and that enjoining those requirements would not restrict or stop the “specific assessment and collection procedures” that would be triggered under Colorado law if those third parties later filed deficient tax returns. Id. at 11.

In contrast, the AIA states 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. § 7421(a) (emphasis added). As the court in Green Solution explained, unlike the TIA's grouping of “restrain” with “enjoin” and “suspend,” the AIA places the term “restraining” after “for the purpose of,” which makes it broader than the TIA. Green Solution, 855 F.3d at 1120. The AIA's specific prohibition on suits “for the purpose” of restraining the assessment or collection of tax thus indicates that an action “need not actually restrain an assessment or collection” of tax to be barred under the AIA; “it need only have restraint of those functions as its purpose.” Id. at 1120 (emphasis in original).²

Given these differences between the AIA and TIA, and because Direct Marketing did not involve a “tax” subject to the AIA, the courts in CIC Services and Florida Bankers correctly determined that Direct Marketing did not control in those cases, just as Direct Marketing should not control here. In fact, no court of appeal has held that Direct Marketing applies to the AIA. The only one to squarely decide that question, the Tenth Circuit, has held that it does not. See Green Solution, 855 F.3d at 1116.

C. The plaintiffs mischaracterize law and facts in further attempts to distinguish or undermine CIC Services and Florida Bankers.

The plaintiffs further attempt to call into question the relevance and authority of CIC Services and Florida Bankers by making several dubious assertions. The plaintiffs, for instance, suggest that, in determining whether the AIA applies, the Court should depart from the established principles these cases follow and adopt what the plaintiffs suggest is a different standard under Cohen v. United States, 650 F.3d 717 (D.C. Cir. 2011) (en banc). The plaintiffs, however, mischaracterize the Cohen decision.

In Cohen, taxpayers challenged a special procedure the IRS had established for refunding an improperly collected excise tax. The IRS previously had assessed and collected the tax at issue, and the taxpayers' right to a refund already had been determined. See id. at 725. The D.C. Circuit thus found that the remedy the plaintiffs sought — a change in the procedure for refunding the tax — could have no implication on the assessment and collection of the tax. For that reason, the court determined that the AIA did not apply. Id. at 725-27.

This case is different. Unlike in Cohen, the relief sought here directly implicates the assessment and collection of a tax. As explained above, in this case, if the plaintiffs obtain the relief they seek, the IRS could no longer assess or collect the penalty — which Congress treats as “tax” — for failing to report the listed transaction identified in Notice 2007-83. Moreover, the relief sought would hamper the IRS's ability to correctly assess taxes associated with abusive tax transactions. Accordingly, nothing stated in Cohen changes the AIA analysis in this action.

In fact, after its decision in Cohen, the D.C. Circuit has held, consistent with Cohen, that the AIA bars suits like this. The Florida Bankers decision provides one example. Another is the decision in Maze v. IRS, 862 F.3d 1087 (D.C. Cir. 2017). In Maze, taxpayers who had failed to report foreign income and had entered an IRS voluntary disclosure program alleged that the IRS had violated the Administrative Procedure Act by issuing rules that prevented these taxpayers from entering an alternative program. Those enrolled in the alternative program could be exempt from certain penalties treated as taxes under the Internal Revenue Code. In analyzing whether the AIA barred the suit, the D.C. Circuit relied on Cohen, recognizing the need to engage in “a careful inquiry into the remedy sought” and “any implication the remedy may have on assessment and collection.” Id. at 1092 (emphasis in original) (quoting Cohen, 650 F.3d at 724). Because, as in this case, the remedy the Maze plaintiffs sought would have the “effect of restraining — fully stopping — the IRS from collecting” the penalties, the court found that “the AIA bars their suit.” Id.³

Given that CIC Services and Florida Bankers likewise analyzed the impact of the remedy sought in determining that the AIA barred the actions there, these decisions are consistent with Cohen. Perhaps for that reason, the plaintiffs make an alternative attempt at calling into question CIC Services and Florida Bankers by also asserting that these decisions conflict with Korte v. Sebelius, 735 F.3d 654 (7th Cir. 2013), and Hobby Lobby Stores, Inc. v. Sebelius, 723 F.3d 1114 (10th Cir. 2013). According to the plaintiffs, CIC Services and Florida Bankers applied the AIA to bar pre-enforcement challenges, while Korte and Hobby Lobby determined the AIA did not bar pre-enforcement challenges in those cases, creating “a significant circuit split as to the effect of a tax penalty on an otherwise permissible challenge to a reporting requirement.” Opp. at 16.

Plaintiffs' characterization of these cases, and the purported “circuit split,” is incorrect. First, as explained above, CIC Services, Florida Bankers, and this action involve subchapter 68B penalties, which the Internal Revenue Code treats as “tax” subject to the AIA. Korte and Hobby Lobby, on the other hand, did not involve such penalties. Rather, they involved penalties under §§ 4980D and 4980H, which the Code does not treat as “tax” subject to the AIA. See Korte, 735 F.3d at 670. Second, the suits in Korte and Hobby Lobby sought relief from the Affordable Care Act's contraceptive coverage requirements. See Korte, 735 F.3d at 658-59. Non-compliant health insurers were subject to a variety of enforcement mechanisms, including ERISA suits, HHS enforcement actions, and the penalties at 26 U.S.C. §§ 4980D and 4980H. See id. at 669. While these penalties were codified in the Internal Revenue Code, the regulatory scheme at issue fell under a separate provision of the U.S. Code structured not as a predicate to the imposition of tax, but as a mandate enforceable by any of these various mechanisms. See id. (“The contraception mandate is not itself a tax provision; its location within the United States Code and corresponding HHS regulations underscores as much.”). In contrast, the Notice at issue here exists solely to identify potentially abusive tax shelters, and serves as a predicate to the assessment and collection of taxes. Korte and Hobby Lobby are thus distinct from this case and from CIC Services and Florida Bankers. No “circuit split” exists.

Finally, the plaintiffs attempt to distinguish CIC Services and Florida Bankers by asserting that those cases did not involve “any form of other disclosures to the IRS,” as they claim this action does. Opp. at 14. The plaintiffs claim that in this action, they disclosed to the IRS their participation in the listed transaction at issue, in tax years for which they reported deductions, by filing IRS Form 8275. They admit that they did not file the Form 8886, which the IRS regulation requires for disclosing reportable (including listed) transactions. Rather, they claim that their Form 8275 disclosure “promotes the IRS's ability to assess and collect taxes” and apparently satisfies the statutory and regulatory requirements at issue. Opp. at 6. The plaintiffs, again, are incorrect.

First, taxpayers may not choose how to comply with statutory and regulatory requirements. Section § 6011 of the Internal Revenue Code provides that, when required by IRS regulations, taxpayers “shall make a return or statement” that includes information as the IRS's “forms or regulations” require. Pursuant to this authority, taxpayers must disclose participation in reportable transactions, as defined by § 6707A(c), specifically by filing a Form 8886 Reportable Transaction Disclosure Statement. See 26 C.F.R. § 1.6011-4(d). The regulation provides that for each year of participating in a reportable transaction, taxpayers must include the Form 8886 with their tax return and, in the first year, also transmit a copy of the Form 8886 to the IRS Office of Tax Shelter Analysis. See id. § 1.6011-4(d), (e). In contrast, a Form 8275 Disclosure Statement is not filed with the Office of Tax Shelter Analysis, and does not disclose participation in a reportable transaction. A Form 8275 serves a different purpose. It provides a means for taxpayers to disclose positions that are not otherwise adequately disclosed on a tax return so as to avoid accuracy-related penalties due to disregard of rules or to a substantial understatement of tax for non-tax shelter items, if the position has a reasonable basis.

Apart from what IRS regulations state and these obvious differences in purpose between Forms 8275 and 8886, the Form 8275 instructions make clear that it cannot substitute for a Form 8886. The instructions specifically state that to disclose participation in a reportable transaction, taxpayers must file a Form 8886. See https:// www.irs.gov/pub/irs-prior/i8275—2020.pdf. And even further discrediting their argument on this point, the plaintiffs claim to have filed the Form 8275 only in years when reporting deductions, not necessarily the years relevant here.

Contrary to their assertion, therefore, the plaintiffs have not made any “other disclosure” that would distinguish the facts here from those in CIC Services or Florida Bankers. They otherwise have pointed to no case or fact that distinguishes or detracts from the decisions in CIC Services or Florida Bankers or in any way indicates that the AIA does not bar this action. Because this action would directly impact the assessment and collection of what Congress treats as “tax” for AIA purposes, the AIA prohibits it.

II. Neither Exception to the AIA Applies.

The plaintiffs likewise misconstrue or ignore law and fact in arguing that the two judicial exceptions to the AIA pertain to this action. For the reasons stated in the opening brief and expanded on below, neither of the exceptions applies.

A. The South Carolina exception does not apply.

The plaintiffs first argue that the exception under South Carolina v. Regan, 465 U.S. 367 (1984), applies. This narrow exception pertains only in cases where the plaintiff has no alternative legal avenue for obtaining the relief sought. See id. at 378. Such is not the case here because, as explained in the opening brief, an action under 26 U.S.C. §7422 would provide plaintiffs the proper avenue for bringing their challenge and could accord the relief they seek. The plaintiffs do not deny that they can obtain the relief sought through a § 7422 action. Rather, they argue that pursuing a § 7422 action would be too burdensome. As explained below, however, even if pursuing a § 7422 action were as burdensome as they claim, which it is not, such burdens would not relieve them of following the procedure Congress has established and courts, including the Ninth Circuit, have found conform with due process principles. And in any event, the plaintiffs' argument here contradicts the facts stated in their complaint.

To bring a § 7422 action, a taxpayer first must file an administrative claim for credit or refund with the IRS to permit the agency an opportunity to evaluate the claim, thereby either precluding the need, or paving the way, for a court's review. See 26 U.S.C. § 6532(a)(1); 26 C.F.R. § 301.6402-2. To challenge Notice 2007-83 specifically, therefore, a taxpayer first must either (1) comply with the Notice's reporting requirement, be assessed taxes associated with the relevant transaction, and pay the taxes, or (2) not comply with the reporting requirement, be assessed the penalty under § 6707A, and pay the penalty. In this case, the plaintiffs allege they followed the latter course. Nevertheless, they argue that they should not have to follow either course before pursuing an action because either complying with the reporting requirement, or not complying and paying the penalty, would be too burdensome in terms of time, money, and having to face potential criminal liability.

As an initial matter, in this case, the plaintiffs allege that they did not comply with the reporting requirement and paid the civil penalty, but do not allege they face any criminal liability. In the Ninth Circuit, to bring a pre-enforcement claim regarding criminal liability, the plaintiffs must allege a “genuine threat of imminent prosecution.” Oklevueha Native Am. Church of Hawaii, Inc. v. Holder, 676 F.3d 829, 835 (9th Cir. 2012). The plaintiffs have made no such allegation in this case. And in any event, the Ninth Circuit has rejected similar arguments regarding the financial and other burdens of a refund action's pay-first rule, holding that the AIA bars pre-enforcement claims where a refund action is available. See California v. Regan, 641 F.2d 721, 723 (9th Cir. 1981) (“California can pay the penalty imposed by 26 U.S.C. § 6652(f) of $10 per day for each day of noncompliance, up to a maximum of $5,000. It can then sue for a refund of such penalties. . . .”); see also Florida Bankers, 799 F.3d at 1066-67 (the AIA “creates a narrow exception to the general administrative law principle that pre-enforcement review of agency regulations is available in federal court”) (citing Abbott Labs. v. Gardner, 387 U.S. 136, 152-53 (1967)).

Whatever its burdens, the refund claim process is what Congress has established for bringing challenges related to the assessment or collection of a tax.⁴ See Brennan v. Southwest Airlines Co., 134 F.3d 1405, 1409 (9th Cir. 1998) (§ 7422 refund suits provide “exclusive remedy” for judicial review of tax challenges). As Chief Justice Roberts has observed, writing for a unanimous Court, the pay-first rule for tax challenges applies broadly, even if the disputed tax is flatly unconstitutional. See United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 10 (2008) (“This is so even though the [AIA's] prohibitions impose upon the wronged taxpayer requirements at least as onerous as those mandated by the refund scheme — the taxpayer must succumb to an unconstitutional tax, and seek recourse only after it has been unlawfully exacted.”); see also Larson v. United States, 888 F.3d 578, 586 (2d Cir. 2018) (“We are sympathetic to [the plaintiff's] dilemma, but that does not permit us to employ APA-based jurisdiction where Congress has provided for review through a specific statutory procedure.”). Likewise, the Ninth Circuit has held, with respect to a challenge to Notice 2007-83 specifically, that the pay-first procedure comports with due process principles. See Interior Glass Sys. v. United States, 927 F.3d 1081, 1086-87 (9th Cir. 2019). Perhaps for this reason, the plaintiffs have cited no case in which a court has found that the South Carolina exception applies where, as here, a refund suit is available.

Moreover, the plaintiffs' argument here does not square with the facts stated in their complaint. Again, the plaintiffs allege that, for at least the 2015 tax year, they did not comply with the reporting requirement, were thus assessed the penalty under §6707A, and paid the penalty. See Compl. ¶¶ 91-93. Having paid the penalty, the plaintiffs put themselves in the position to pursue a § 7422 refund action. And having paid the penalty, to argue now that either complying with the reporting requirement — which they have not done — or paying the penalty would be too burdensome is, at the least, disingenuous.

The plaintiffs thus state no legitimate reason that the South Carolina exception applies in this case. Again, they do not even contest that a § 7422 action is available to them and could, if their claims are correct, accord the relief they seek. Plus, in both their opposition and complaint, the plaintiffs make claims regarding the transaction identified in the Notice (in addition to their claims regarding the Notice's purported deficiencies). Making such claims further demonstrates that the plaintiffs actually seek to avoid the tax associated with the transaction. For this reason as well, the plaintiffs should follow the procedure for a § 7422 action and bring these claims to the IRS for administrative review before bringing them to the Court. Under binding Ninth Circuit precedent, the Court should not permit the plaintiffs to circumvent this congressionally mandated procedure given the availability of a § 7422 action.

B. The Williams Packing exception does not apply.

Likewise, the plaintiffs' argument regarding the other judicial exception to the AIA, under Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1 (1962), lacks merit. This exception applies if the plaintiffs can show both that (1) under no circumstances could the United States ultimately prevail, and (2) “equity jurisdiction” otherwise exists, i.e., they have no adequate remedy at law. See id. at 7. As explained above, a § 7422 action provides the plaintiffs an adequate remedy at law. The plaintiffs thus cannot meet the second prong of the Williams Packing exception. For this reason alone, the Williams Packing exception does not apply, and the Court need not examine the first prong.

In any event, the plaintiffs also have failed to show that no circumstance exists in which the United States could prevail on the merits. The plaintiffs' sole argument on this point is that the United States could not prevail against their claim that Notice 2007-83 should have gone through notice and comment. The plaintiffs, however, ignore that, through the relevant provisions of the American Jobs Creation Act (“AJCA”), Congress endorsed and strengthened the existing regulatory scheme undergirding Notice 2007-83, providing teeth to the reporting requirement by adding the enforcement penalty. See, e.g., Pub. L. No. 108-357, § 811(a) (Oct. 22, 2004) (codified at 26 U.S.C. § 6707A(a). When it enacted the AJCA, Congress was aware of the existing IRS procedure for designating “listed transactions” — those designed to evade tax — through notices, and must have known that requiring notice and comment for each such designation would undermine the regulatory scheme. Given this history, the United States has at least a colorable claim that Notice 2007-83 should not have gone through notice and comment.

The plaintiffs thus have failed to state a legitimate basis for either exception to the AIA to apply here.

CONCLUSION

Given that the AIA imposes a jurisdictional bar in this action, and, as explained in the opening brief, the Administrative Procedure Act does not otherwise provide an independent basis for jurisdiction (and the plaintiffs have not pled the jurisdictional requirements for a § 7422 suit), the Court lacks any basis for subject matter jurisdiction. The United States thus respectfully requests that the Court dismiss this action.

Dated: March 11, 2020

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

CHARLES J. BUTLER
E. CARMEN RAMIREZ
Trial Attorneys, Tax Division
U.S. Department of Justice

Of Counsel:
MICHAEL BAILEY
United States Attorney

Attorneys for the United States of America