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Government Seeks Dismissal of IRS Notice Challenge

JAN. 2, 2020

Govig & Associates Inc. et al. v. United States et al.

DATED JAN. 2, 2020
DOCUMENT ATTRIBUTES

Govig & Associates Inc. et al. v. United States et al.

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' MOTION TO DISMISS AND SUPPORTING MEMORANDUM

Oral Argument Requested

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General

CHARLES J. BUTLER
CARMEN RAMIREZ
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-514-6062 (Butler)
202-616-2885 (Ramirez)
Facsimile: 02-307-0054
Email: Charles.J.Butler@usdoj.gov
E. Carmen.Ramirez@usdoj.gov

MICHAEL BAILEY
United States Attorney
Of Counsel

Attorneys for United States

The United States of America hereby moves to dismiss the plaintiffs' action pursuant to Fed. R. Civ. P. 12(b)(1).


Table of Contents

INTRODUCTION

BACKGROUND

A. Statutory and Regulatory Regime

B. IRS Notice 2007-83

C. The Plaintiffs' Claims

ARGUMENT

I. THE AIA AND THE DJA'S TAX EXCEPTION BAR THIS ACTION

II. THE JUDICIAL EXCEPTIONS TO THE AIA DO NOT APPLY HERE

A. The Exception in Regan Does Not Apply

B. The Exception in Williams Packing Does Not Apply

1) The plaintiffs cannot show that under no circumstance could the United States prevail on the merits

a) The plaintiffs cannot establish conclusively that the IRS did not follow proper procedures

b) The plaintiffs cannot establish conclusively that Notice 2007-83 is impermissibly vague

c) The plaintiffs cannot establish conclusively that Notice 2007-8 was issued in an arbitrary manner

2) The plaintiffs cannot show that “equity jurisdiction” exists.

III. THE COMPLAINT OTHERWISE STATES NO BASIS FOR SUBJECT MATTER JURISDICTION

CONCLUSION

Table of Authorities

Federal Cases

Ai v. United States, 809 F.3d 503 (9th Cir. 2015)

Alexander v. “Americans United” Inc., 416 U.S. 752 (1974)

Allen v. Milas, 896 F.3d 1094 (9th Cir. 2018)

Am. Bicycle Ass'n v. United States, 895 F.2d 1277 (9th Cir. 1990)

Asiana Airlines v. FAA, 134 F.3d 393 (D.C. Cir. 1998)

Baxter v. United States, 2016 WL 467499 (N.D. Cal. Feb. 8, 2016)

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

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

Boutilier v. INS, 387 U.S. 118 (1967)

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

California v. Regan, 641 F.2d 721 (9th Cir. 1981)

Church of Scientology of California v. United States, 920 F.2d 1481 (9th Cir. 1990)

CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019)

Commissioner v. Shapiro, 424 U.S. 614 (1976)

Confederated Tribes and Bands of Yakama Indian Nation v. Alcohol & Tobacco Tax & Trade Bureau, 843 F.3d 810 (9th Cir. 2016)

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

Dimaya v. Lynch, 803 F.3d 1110 (9th Cir. 2015)

Direct Marketing Assoc. v. Brohl, 575 U.S. 1 (2015)

Dunn & Black, P.S. v. United States, 492 F.3d 1084 (9th Cir. 2007)

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 (D.C. Cir. 2015)

Fredrickson v. Starbucks Corp., 840 F.3d 1119 (9th Cir. 2016)

Green Solution Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir.), cert. denied, 138 S. Ct. 1231 (2018)

Heckler v. Chaney, 470 U.S. 821 (1985)

Hinck v. United States, 550 U.S. 501 (2007)

Interior Glass Sys. v. United States, 927 F.3d 1081 (9th Cir. 2019), cert. denied, __ S. Ct. __, 2019 WL 6689704 (Dec. 9, 2019)

Judicial Watch, Inc. v. Rossotti, 317 F.3d 401 (4th Cir. 2003)

Kern Cnty. Farm Bureau v. Allen, 450 F.3d 1072 (9th Cir. 2006)

Kolender v. Lawson, 461 U.S. 352 (1983)

Marsh v. Oregon Nat. Res. Council, 490 U.S. 360 (1989)

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

Oebermann v. United States, No. 90-15063, 1990 WL 163556 (9th Cir. 1990)

Riverbend Farms, Inc. v. Madigan, 958 F.2d 1479 (9th Cir. 1992)

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

Smith v. United States, 431 U.S. 291 (1977)

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

Stonecipher v. Bray, 653 F.2d 398 (9th Cir.1981)

Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985)

United States v. American Friends Svc. Cmte., 419 U.S. 7 (1974)

United States v. Bisceglia, 420 U.S. 141 (1975)

United States v. White Mountain Apache Tribe, 537 U.S. 465 (2003)

Uptergrove v. United States, 2009 WL 2244185 (E.D. Cal. July 27, 2009

Washington v. United States, 2016 WL 6995355 (C.D. Cal. Mar. 31, 2016), report adopted, 2016 WL 6995357 (C.D. Cal. May 31, 2016)

WildEarth Gardens v. EPA, 759 F.3d 1064 (9th Cir. 2014)

Federal Statutes

26 U.S.C. § 2201

26 U.S.C. § 419

26 U.S.C. § 419A

26 U.S.C. § 6011

26 U.S.C. § 6532

26 U.S.C. § 6671

26 U.S.C. § 6707A

26 U.S.C. § 7421

26 U.S.C. § 7422

28 U.S.C. § 1331

28 U.S.C. § 1341

28 U.S.C. § 1346

5 U.S.C. § 701

5 U.S.C. § 702

5 U.S.C. § 704

Federal Rules

Fed. R. Civ. P. 12

Federal Regulations

26 C.F.R. § 1.6011-4

26 C.F.R. § 1.6011-4T

26 C.F.R. § 301.6402-2

65 Fed. Reg. 11269

67 Fed. Reg. 41324

67 Fed. Reg. 64799

68 Fed. Reg. 10161

Other Authorities

2007-45 I.R.B. 960, 2007 WL 3015114 (Oct. 17, 2007)

H.R. Conf. Rep. 108-755 (Oct. 7, 2004)

H.R. Rep. 108-548 (June 16, 2004)

IRS Notice 2007-83

IRS Notice 2016-66


INTRODUCTION

The plaintiffs, an executive recruiting company and its owners, engaged in an abusive tax transaction disguised as an employee benefit plan. To combat these types of transactions, the IRS, pursuant to authority under 26 U.S.C. § 6011,1 developed regulations that require taxpayers to report such transactions. In § 6707A, Congress incorporated into the Code language from these regulations and gave the regulations teeth, adding a penalty for failing to comply with the reporting requirement. Section 6707A also defines the transactions that must be reported as those the IRS has identified as potentially abusive. And under the § 6011 regulations, the IRS identifies such reportable transactions through published guidance, including IRS notices.

The plaintiffs here failed to report the abusive transaction they engaged in. The IRS thus assessed them a penalty for the 2015 tax year, and they paid it. Yet the plaintiffs do not seek a refund for that penalty. They do not ask the Court to find that the transaction they engaged in was proper under the Code, or contest the overall reporting requirement for potentially abusive transactions. Rather, they seek to remove the transaction they engaged in (and similar transactions) from that reporting requirement by challenging the IRS notice identifying that type of transaction as potentially abusive. Specifically, the plaintiffs seek to invalidate IRS Notice 2007-83, asserting that it violates the Administrative Procedure Act, 5 U.S.C. § 551, et seq. (“APA”). Notice 2007-83 designates certain trust arrangements, purported to be employee benefit funds, as “listed transactions.” Under § 6707A and the § 6011 regulations, listed transactions are a category of transactions that must be reported to the IRS. This action thus seeks to eliminate the reporting requirement for abusive employee benefit schemes, which would eliminate the penalty for failing to report such schemes and hinder the IRS's ability to obtain information on them. As explained below, the Court lacks jurisdiction to hear this action.

The Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421, and the tax exception to the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201, prohibit the relief the plaintiffs seek. These provisions bar suits that would have the purpose or effect of restraining the IRS from assessing or collecting taxes or from taking actions necessary to assess or collect taxes. The Code treats the penalty for failing to comply with the listed transaction reporting requirement as a “tax.” Thus, while the plaintiffs have styled this action as a challenge to the Notice and the burdens of complying with the reporting requirement, rather than a direct a challenge to the penalty, they cannot avoid the AIA's and DJA's prohibition. The plaintiffs do not allege that they experienced any reporting burden. They in fact did not report their participation and have been assessed a penalty as a result. Yet while invalidating the Notice would presumably provide the plaintiffs grounds for a refund of the penalty, the plaintiffs have not pled the elements of a refund action. Rather, this action seeks only prospective relief — to eliminate the reporting requirement for their transaction and eliminate the penalty for failing to report. Such relief would restrain the IRS's ability, in future years, to assess taxes and take steps to assess taxes.

In a recent case involving a similar challenge to a reporting requirement that stems from a similar IRS Notice, the Sixth Circuit held that the AIA and DJA prohibited the challenge because it would restrain the IRS's ability to assess and collect taxes. See CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019); see also Florida Bankers Ass'n v. U.S. Dep't of the Treas., 799 F.3d 1065 (D.C. Cir. 2015) (holding that AIA and DJA barred challenge to IRS reporting requirement), cert. denied, 136 S. Ct. 2429 (2016). Likewise, the AIA and DJA prohibit the challenge here.

The Supreme Court has carved out two narrow exceptions to the AIA's and DJA's prohibition on suits that would restrain the assessment or collection of taxes. These exceptions relate to whether the plaintiffs have an alternative legal remedy and whether they can demonstrate that under no circumstances could the United States prevail on the merits. No such exception applies here. First, a refund suit under 26 U.S.C. § 7422 would provide an adequate legal remedy for the plaintiffs' claims. Having paid the penalties for 2015, the plaintiffs could challenge them in a refund suit on the basis that Notice 2007-83 violates the APA. Moreover, the Ninth Circuit recently made clear that a refund suit is the proper vehicle for challenging penalties imposed for failing to meet the reporting requirement for the listed transaction in Notice 2007-83. See Interior Glass Sys. v. United States, 927 F.3d 1081, 1083, 1086-87 (9th Cir. 2019), cert. denied, __ S. Ct. __, 2019 WL 6689704 (Dec. 9, 2019).

Second, the plaintiffs cannot demonstrate that under no circumstances could the United States prevail against their attempt to invalidate Notice 2007-83. Particularly in light of the authority Congress has given the IRS to obtain information on tax-avoidance transactions, the United States could prevail against the plaintiffs' claims that the Notice is procedurally flawed, issued in an arbitrary or capricious manner, and is impermissibly vague. In Interior Glass, in fact, the Ninth Circuit rejected the claim that an ordinary taxpayer could not discern whether a transaction was “substantially similar” to the listed transaction identified in Notice 2007-83. 927 F.3d at 1088-87.

The plaintiffs thus cannot avoid the AIA's and DJA's jurisdictional bar. In addition, while they brought this action under the APA, the APA does not provide an independent basis for jurisdiction. And while the relief the plaintiffs seek is prospective, to the extent the Court reads their Complaint as challenging the penalty for 2015, the Complaint does not plead the jurisdictional prerequisites for a refund suit. The Court thus has no basis for subject matter jurisdiction and should dismiss this action.

BACKGROUND

A. Statutory and Regulatory Regime

The federal tax system “is based on a system of self-reporting.” United States v. Bisceglia, 420 U.S. 141, 145 (1975). As the Supreme Court has observed, however, “it would be naive to ignore the reality that some persons attempt to outwit the system, and tax evaders are not readily identifiable.” Id. To combat this problem, and best employ the IRS's limited enforcement resources, Congress has enacted legislation, codified in §§ 6011 and 6707A, that grants the IRS broad authority to establish procedures for gathering information and that requires taxpayers to affirmatively disclose their participation in transactions that could be used to evade taxes.

Section 6011 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. 26 U.S.C. § 6011. Pursuant to this authority, IRS regulations issued under § 6011 require taxpayers to disclose participation in “reportable transactions,” i.e., transactions that are, or could be, used for tax avoidance. See 26 C.F.R. § 1.6011-4. And in 2004, in enacting the American Jobs Creation Act (AJCA), Congress adopted language from these regulations and strengthened them. By adding § 6707A, the AJCA gave teeth to the reportable transaction disclosure requirements, adding to the Code penalties for failure to comply. See, e.g., Pub. L. No. 108-357, § 811(a) (Oct. 22, 2004) (codified at 26 U.S.C. § 6707A(a) (a taxpayer “who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty”). Also in § 6707A, the AJCA incorporated into the Code the regulations on designation and disclosure of reportable transactions, including “listed transactions,” a type of reportable transaction. Prior to the AJCA's enactment, the term “reportable transaction” appeared nowhere in the Code. With the addition of § 6707A, the Code now defined a “reportable transaction” with specific reference to the regulation, explicitly giving the IRS the authority to identify such transactions: “The term 'reportable transaction' means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.” Pub. L. No. 108-357, § 811(a) (Oct. 22, 2004) (codified at 26 U.S.C. § 6707A(c)(1)). In addition, the Code now defined a “listed transaction” as “a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.” See Pub. L. No. 108-357, § 811(a) (codified at 26 U.S.C. § 6707A(c)(2)).

Treasury and the IRS developed the regulatory scheme governing reportable and listed transactions beginning in 2000. In that year, Treasury issued temporary regulation 26 C.F.R. § 1.6011-4T, which required corporate taxpayers that participated in a reportable transaction to disclose such participation to the IRS. As is the case now, one category of reportable transaction was a listed transaction. The temporary regulation defined “listed transaction” as a transaction that “is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction for purposes of section 6011.” 26 C.F.R. § 1.6011-4T(b)(2). When Treasury issued the temporary regulation, Treasury and the IRS also published a notice of proposed rulemaking that contained this definition of listed transaction and sought comments from the public. See 65 Fed. Reg. 11269 (Mar. 2, 2000).2

Treasury finalized the temporary regulation in March 2003. See 68 Fed. Reg. 10161. The final regulation retained the same definition of “listed transaction” as the prior version, including that such transactions could be “identified by notice.” 26 C.F.R. § 1.6011-4(b)(2) (2003). The final regulation's preamble does not indicate that the IRS received any comments on the definition of, or methods of designating a transaction as, a listed transaction. See 68 Fed. Reg. 10161.

The 2003 regulation was the version in place when Congress, in adding § 6707A to the Code, embraced the regulation's procedures for designating reportable and listed transactions. In defining “reportable transaction” with specific reference to the regulation, see § 6707A(c)(1), and defining “listed transaction” as a transaction “specifically identified by the Secretary as a tax avoidance transaction,” § 6707A(c)(2), Congress left it to the IRS to administratively determine the particular types of transactions that constitute “reportable transactions” and “listed transactions.” In enacting these provisions, therefore, Congress not only endorsed the IRS's method for designating reportable and listed transactions, it provided the IRS flexibility when making such designations. See H.R. Conf. Rep. 108-755, at 597 n.462 (Oct. 7, 2004) (explaining that the Secretary may modify, as appropriate, the definitions of “reportable transactions” and “listed transaction,” including the definition of “substantially similar”).

Likewise, as the Ninth Circuit recently observed, by adding the penalty provision, Congress strengthened the IRS's ability to obtain information on tax avoidance transactions through this reporting regime: “Congress added the § 6707A penalty provision in 2004 to encourage voluntary disclosure of listed transactions.” Interior Glass, 927 F.3d at 1087; see also H.R. Rep. 108-548, at 261 (June 16, 2004) (stating that “the best way [for the IRS] to combat tax shelters is to be aware of them”).

B. IRS Notice 2007-83

Within the authority that Congress granted the IRS, and pursuant to 26 C.F.R. § 1.6011-4(b)(2) (2003), the IRS, in October 2007, issued Notice 2007-83. See 2007-45 960, 2007 WL 3015114 (Oct. 17, 2007). Notice 2007-83 designated as “listed transactions” certain trust arrangements that had been “promoted to small businesses and other closely held businesses as a way to provide cash and other property” to the business owners “on a tax-favored basis.” 2007 WL 3015114, at *2. Promoters of these arrangements claimed that a business's contributions to the trust would be deductible as “qualified cost” under 26 U.S.C. §§ 419 and 419A, but that the business owners would have no corresponding addition to their taxable income. Id.

According to the Notice, under these arrangements, businesses used trusts to create welfare benefit funds that included cash-value life insurance policies. The business would contribute to the trust, which paid the insurance policy premiums, anticipating that after some years the arrangement would terminate and the accumulated cash-value life insurance policies, cash, or other trust property would be distributed to the employees participating in the arrangement. Id. at *3-4. The business typically structured the arrangement so that, on termination, the business owners and other key employees would receive, directly or indirectly, all or a substantial portion of the trust's assets. Id. at *4.

The Notice designated these arrangements as listed transactions subject to the disclosure requirements of § 6011 and 26 C.F.R. § 1.6011-4 because of their potential as tax avoidance schemes. Typically in these arrangements, the business would deduct its contributions to the trust (for the premiums paid on the cash-value life insurance policies), thereby reducing the business's taxable income. See Notice 2007-83, 2007 WL 3015114, at *4. But the business owners, who received the benefit of the paid-in premiums, either would not include the premiums in taxable income or would include significantly less than the premiums paid. See id. at *4-5. The arrangements thus invested a business's funds for its owners' benefit and generated current tax deductions for the business, but resulted in little or no corresponding taxable income for the owners. See id. at *2-5. Transfers to the trust thus could be, in substance, distributions of dividend income or deferrals of compensation. See id. at *5-8. Upon disclosure of such a transaction, the IRS could challenge the business's deductions and seek to include in the business owner's gross income the payments made to the trust. See id.

Notice 2007-83 defines the transaction that it designates as “listed” as consisting of four specific elements:

(1) the arrangement involved a trust or other fund described in 26 U.S.C. § 419(e)(3) that is purportedly a welfare benefit fund;

(2) contributions to the trust or other fund were not governed by a collective bargaining agreement;

(3) the trust or other fund paid premiums on one or more cash-value life insurance policies that accumulated value; and

(4) the employer took a deduction that exceeded the sum of certain amounts, depending on whether the benefits provided under the plan were insured or uninsured.

Id. at *9-13.

In separate guidance issued contemporaneously with Notice 2007-83, the IRS interpreted certain aspects of the law applicable to the kind of transaction identified in the Notice. See Revenue Ruling 2007-65, 2007-45 I.R.B. 949.

C. The Plaintiffs' Claims

The plaintiffs' Complaint challenges Notice 2007-83 as violating the APA. The plaintiffs seek to enjoin enforcement of the requirement to report participation in transactions that the Notice designates as listed transactions, and to set aside the Notice.

Plaintiff Govig & Associates, Inc. (“Govig”) is a privately held executive recruiting company. Its only shareholders are trusts associated with the individual plaintiffs, i.e., Todd Govig, who is the company's president, and Jeanette and Richard Govig, a married couple. Compl. ¶¶ 5-7, 42-44. The plaintiffs allege that in August 2019, the IRS assessed against Govig, Todd, and Richard penalties under § 6707A, for the 2015 tax year, for failure to disclose participation in a transaction designated as a listed transaction in Notice 2007-83. Id. ¶¶ 91-93. Govig paid the penalty in August of 2019; Todd and Richard paid the penalties in September of 2019.3 Id. According to the Complaint, the IRS is investigating whether the plaintiffs should have disclosed their participation in the same transaction in the 2016 and 2017 tax years. Id. ¶ 94.

The plaintiffs allege that the § 6707A penalties stem from their failure to disclose their participation in a Death Benefit Trust and Restricted Property Trust (“DBT/RBT”) transaction, which the IRS had determined was a listed transaction under Notice 2007-83. The DBT/RBT is a complicated two-part trust arrangement that Govig adopted in 2015. See id. ¶¶ 46-76.

The Complaint does not state that the plaintiffs seek a refund of the § 6707A penalties. Rather, they seek injunctive relief to invalidate Notice 2007-83 as issued in violation of the APA and to enjoin enforcement of the related listed transaction reporting requirement. Specifically, the plaintiffs claim that Notice 2007-83 is a “rule” subject to the APA's notice and comment requirements, which the IRS did not follow in issuing the Notice. Id. ¶¶ 128-34. They also claim that the Notice does not describe the listed transaction with the requisite specificity, thereby violating the APA and due process principles. Id. ¶¶ 97-104, 118. And they claim that the IRS issued Notice 2007-83 in an arbitrary and capricious manner, in violation of the APA. Id. ¶¶ 113-118.

ARGUMENT

Because the plaintiffs seek injunctive relief with respect to federal taxes, and otherwise have failed to plead the jurisdictional prerequisites for a refund suit, this Court lacks jurisdiction to hear their claims. The Court has no jurisdiction over a suit against the United States unless Congress has made “a clear statement” waiving immunity, and the plaintiffs have made “a claim falling within the terms of the waiver.” United States v. White Mountain Apache Tribe, 537 U.S. 465, 472 (2003). Such is not the case here. As explained below, the AIA and the DJA's tax exception prohibit claims for injunctive relief with respect to federal taxes. Moreover, the narrow judicial exceptions to this prohibition do not apply here because a refund suit would provide an adequate legal remedy for the plaintiffs' claims and because the plaintiffs cannot show that under no circumstances could the United States prevail against their claims. Given that the APA does not provide an independent basis for jurisdiction, and that the Complaint does not plead the jurisdictional prerequisites for a refund suit, the plaintiffs have made no claim that falls within a waiver of immunity. The Court should thus dismiss this action for lack of subject matter jurisdiction.

I. THE AIA AND THE DJA'S TAX EXCEPTION BAR THIS ACTION.

The AIA provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” 26 U.S.C. § 7421. Likewise, the DJA provides that a Court “may declare the rights and other legal relations of any interested party seeking” a declaration “except with respect to Federal taxes.” 28 U.S.C. § 2201. The DJA's tax exception is “at least as broad” as the AIA. California v. Regan, 641 F.2d 721, 723 (9th Cir. 1981) (citing Bob Jones Univ. v. Simon, 416 U.S. 725, 732-33 n.7 (1974)). Together, these provisions protect “the Government's ability to collect a consistent stream of revenue” by requiring taxpayers to fully pay their liabilities before challenging them in District Court. Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 543 (2012) (“NFIB”); see also Bob Jones, 416 U.S. at 736-37 (AIA focuses on “the protection of the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference, and to require that the legal right to the disputed sums be determined in a suit for refund”) (internal quotes omitted).4 Because in this action, as explained below, the plaintiffs' challenge to the listed transaction reporting requirement would restrain tax assessment and collection, and actions necessary for assessment and collection, the AIA bars this action.

As an initial matter, the § 6707A penalty for failure to comply with this reporting requirement constitutes a “tax” under the Internal Revenue Code and, therefore, for AIA purposes. Section 6707A appears in subchapter 68B of the Code. Subchapter 68B penalties are “treated as taxes under Title 26 [the Internal Revenue Code], which includes the Anti-Injunction Act.” NFIB, 567 U.S. at 544-45 (holding that AIA did not apply in that case because the penalty at issue did not appear in subchapter 68B); accord 26 U.S.C. § 6671 (subchapter 68B penalties “shall be assessed and collected in the same manner as taxes”). Courts consistently have applied this principle in finding that the AIA bars challenges to such penalties. See, e.g., Florida Bankers Ass'n v. U.S. Dep't of the Treas., 799 F.3d 1065, 1068 (D.C. Cir. 2015) (“[U]nlike in NFIB, the penalty is located in Chapter 68, Subchapter B” and thus “is a 'tax' under the [AIA].”); CIC Servs. LLC v. IRS, 925 F.3d 247, 254 (6th Cir. 2019) (“[T]he penalties here are all located in Chapter 68, Subchapter B of the Tax Code, and as a result are treated as taxes themselves for purposes of the AIA.”); Washington v. United States, 2016 WL 6995355, at *3 (C.D. Cal. Mar. 31, 2016) (because frivolous filing penalties appear in subchapter 68B, they constitute “taxes” for purposes of AIA) (citations omitted), report adopted, 2016 WL 6995357 (C.D. Cal. May 31, 2016).

The plaintiffs' challenge to the listed transaction reporting requirement thus would restrain the assessment or collection of tax — the penalty for failing to report. If successful, the plaintiffs' suit would eliminate the IRS's ability to collect the § 6707A penalty itself. The suit also would hinder actions the IRS takes to assess and collect taxes — i.e., issuing notices that designate listed transactions so the IRS can obtain information on tax-avoidance transactions and correctly assess taxes on such transactions.

Consistent with this rationale, in recent cases involving similar challenges to reporting requirements, the Sixth and D.C. Circuits held that the AIA barred those challenges because they would restrain the assessment of penalties for failing to comply with the reporting requirements. In CIC Services, 925 F.3d at 247, for instance, the plaintiffs challenged IRS Notice 2016-66, which designated certain captive insurance arrangements as reportable transactions. Like the Notice at issue here, Notice 2016-66 is enforced with subchapter 68B penalties, including § 6707A penalties. And like the plaintiffs here, the plaintiffs in CIC Services argued that their suit targeted the Notice's “information gathering” and “records maintenance” requirements, not the assessment or collection of tax. Id. at 255. The court in CIC Services observed, however, that if the plaintiffs' suit succeeded in overturning the Notice, it would unquestionably “restrain (indeed eliminate)” the enforcement penalties. Id. at 255. The AIA thus barred the suit. Id.

Similarly, in Florida Bankers, 799 F.3d 1065, the plaintiffs challenged a requirement that banks report interest paid to certain non-resident aliens. Writing for the majority, then-Judge Kavanaugh of the D.C. Circuit stated:

“[T]he penalty at issue here is itself a tax for purposes of the Anti-Injunction Act. . . . [B]ecause the Code defines the penalty 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. This case is therefore at the heartland of the Anti-Injunction Act.”

Id. at 1069-70. Like the plaintiffs here, the plaintiffs in Florida Bankers argued that they were seeking “relief from a regulatory mandate” that imposed burdens “separate and apart from the assessment or collection of taxes.” See id. at 1070. The court, however, rejected the plaintiffs' “nifty wordplay.” Id. It emphasized that the “Supreme Court has consistently ruled . . . that plaintiffs cannot evade the Anti-Injunction Act by purporting to challenge only the regulatory aspect of a regulatory tax.” Id. (citing Alexander v. “Americans United” Inc., 416 U.S. 752, 755-60 (1974); Bob Jones, 416 U.S. at 732-39)).

The holdings in Florida Bankers and CIC Services thus follow longstanding AIA principles. As the Supreme Court has emphasized, the Court has given the AIA “almost literal effect.” Bob Jones, 416 U.S. at 737. It has done so because the AIA not only bars direct restraints on assessment or collection, but “is equally applicable to activities which are intended to or may culminate in the assessment or collection of taxes.” Church of Scientology of California v. United States, 920 F.2d 1481, 1486 (9th Cir. 1990) (quoting Blech v. United States, 595 F.2d 462, 466 (9th Cir. 1979)); see also Uptergrove v. United States, 2009 WL 2244185, at *4 (E.D. Cal. July 27, 2009) (AIA “prohibits collateral lawsuits that would have the effect of restraining the collection of taxes”) (citing Dickens v. United States, 671 F.2d 969, 971 (6th Cir. 1982) (AIA barred suits to prevent IRS from using evidence collected from criminal warrants)); Baxter v. United States, 2016 WL 467499, at *2 (N.D. Cal. Feb. 8, 2016) (AIA barred challenge to audit conducted as part of program to develop statistical database for IRS).

Accordingly, while the plaintiffs here ostensibly challenge only the requirement to report listed transactions identified in Notice 2007-83 — just as the plaintiffs in Florida Bankers and CIC Services ostensibly challenged only the reporting requirements in those cases — they cannot avoid the AIA's bar to that challenge.

Nevertheless, in their Complaint, the plaintiffs allege that the Supreme Court's decision in Direct Marketing Assoc. v. Brohl, 575 U.S. 1 (2015), renders the AIA inapplicable here. They are incorrect. As the court in Florida Bankers pointed out, Direct Marketing involved a penalty, but that penalty did not constitute a tax for AIA purposes. Moreover, as the Tenth Circuit emphasized in Green Solution Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017), cert. denied, 138 S. Ct. 1231 (2018), Direct Marketing involved a statute that differs from the AIA in important respects.

The plaintiff in Direct Marketing sought to enjoin enforcement of a Colorado law that required certain retailers to maintain and submit records pertaining to sales for which the retailers did not collect state sales and use taxes. The law imposed a penalty for failure to comply with this requirement. The state argued that the Tax Injunction Act (“TIA”) barred the plaintiff's suit. The TIA provides that no federal district court shall “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 court of such State.” 28 U.S.C. § 1341. The Court in Direct Marketing held that the TIA did not bar the suit because the reporting requirement did not involve an “assessment, levy, or collection” within the TIA's scope. See 575 U.S. at 9-11.

Unlike the subchapter 68 penalties here, however, the penalty in Direct Marketing was not a tax. See Fla. Bankers, 799 F.3d at 1069 (“The penalty in Direct Marketing Association was not itself a tax, or at least it was never argued or suggested that the penalty in that case was itself a tax. The Anti-Injunction Act therefore applies here, unlike in Direct Marketing Association.”); see also CIC Serv., 925 F.3d at 254 (“Florida Bankers is directly on point, consistent with Direct Marketing, and in accordance with a broader survey of Supreme Court and circuit court precedent. . . . Like the penalty in Florida Bankers, the penalties here are all located in Chapter 68, Subchapter B of the Tax Code, and as a result are treated as taxes themselves for purposes of the AIA.”). In a similar vein, Justice Ginsburg's concurrence in Direct Marketing indicated that the outcome in that case may have been different had the case involved a challenge to a tax that could have been addressed through a refund suit:

The [plaintiff] is not challenging its own or anyone else's tax liability or tax collection responsibilities. And the claim is not one likely to be pursued in a state refund action. A different question would be posed, however, by a suit to enjoin reporting obligations imposed on a taxpayer or tax collector, e.g., an employer or an in-state retailer, litigation in lieu of a direct challenge to an “assessment,” “levy,” or “collection.” The Court does not reach today the question whether the claims in such a suit, i.e., claims suitable for a refund action, are barred by the Tax Injunction Act. On that understanding, I join the Court's opinion.

Direct Marketing, 575 U.S. at 19 (Ginsburg, J., concurring).

In distinguishing the Direct Marketing decision, the Tenth Circuit in Green Solution also stressed the difference in language and purpose between the TIA and AIA. In Green Solution, a marijuana dispensary sought to enjoin the IRS's investigation into its business records. The Tenth Circuit determined that the IRS investigation amounted to “an activity leading up to” an assessment of taxes, and, therefore, the AIA barred the dispensary's challenge. 855 F.3d at 1120-22. In distinguishing Direct Marketing, the Tenth Circuit emphasized that the TIA and AIA “contain different language.” Id. at 1119. Unlike the TIA, the AIA does not simply state that courts shall not restrain or enjoin the assessment or collection of tax, but rather prohibits any “suit for the purpose of restraining the assessment or collection of any tax[.]” 26 U.S.C. § 7421(a) (emphasis added). The AIA's focus thus centers on the suit's actual purpose and possible effects. If, therefore, the ultimate goal of a suit is to restrain the assessment or collection of tax, the AIA prohibits the suit regardless of whether the suit seeks to enjoin the actual acts of assessment or collection or seeks to preclude assessment and collection by restraining preliminary actions necessary for such assessment and collection. See Green Solution, 855 F.3d at 1119-20.

The Ninth Circuit has not had occasion to analyze the Direct Marketing decision's effect, if any, on suits challenging IRS reporting requirements or IRS investigations. In Fredrickson v. Starbucks Corp., 840 F.3d 1119 (9th Cir. 2016), however, the Ninth Circuit determined that its decision applying the TIA and AIA prohibitions in that case was consistent with the Direct Marketing decision. In Fredrickson, former Starbucks baristas sought declaratory and injunctive relief regarding Starbucks' practice of withholding state and federal taxes from the baristas' paychecks based on the cash tips they had received. The Ninth Circuit held that, because the relief sought would enjoin, suspend, or restrain the collection of state and federal taxes, both the TIA and the AIA prohibited the suit. Id. at 1122-24. The court emphasized that its holding was “consistent with the scope of the Tax Injunction Act outlined by the Supreme Court in Direct Marketing.” Id. at 1123.

Nothing in the Ninth Circuit's analysis of Direct Marketing, or in Direct Marketing itself, indicates that the Direct Marketing decision would alter the analysis on the AIA's applicability in this case. In this case, as in Florida Bankers, CIC Services, and Green Solution, the AIA applies and bars the plaintiffs' claims.

II. THE JUDICIAL EXCEPTIONS TO THE AIA DO NOT APPLY HERE.

The judicial exceptions to the AIA also do not affect its application here. Two limited judicial exceptions to the AIA's bar on injunctive relief exist under South Carolina v. Regan, 465 U.S. 367 (1984), and Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1 (1962). As explained below, neither of these exceptions applies.

A. The Exception in Regan Does Not Apply.

The Supreme Court in Regan recognized an exception to the AIA in cases where the plaintiff has no alternative legal avenue for pursuing its challenge. See Regan, 465 U.S. at 378. As the Ninth Circuit and other courts have emphasized, this exception to the AIA's jurisdictional bar “is a narrow one.” Confederated Tribes and Bands of Yakama Indian Nation v. Alcohol & Tobacco Tax & Trade Bureau, 843 F.3d 810, 815 (9th Cir. 2016) (declining to apply exception because claims could be raised in refund suit); see also Am. Bicycle Ass'n v. United States, 895 F.2d 1277, 1281 (9th Cir. 1990) (declining to apply exception and noting that “[p]romoting the purpose behind the [AIA] requires a strict construction of any possible exceptions”); RYO Machine, LLC v. U.S. Dep't of Treas., 696 F.3d 467, 472 (6th Cir. 2012) (describing Regan exception as “very narrow”); Judicial Watch, Inc. v. Rossotti, 317 F.3d 401, 408 n.3 (4th Cir. 2003) (“Because of the strong policy animating the [AIA], and the sympathetic, almost unique, facts in Regan, courts have construed the Regan exception very narrowly. . . .”).

In this case, this narrow exception does not apply because the plaintiffs can bring their claims in a refund suit under 26 U.S.C. § 7422. The plaintiffs have attempted to avoid a refund suit, styling this action as a challenge to Notice 2007-83 and the prospective burdens of complying with the associated reporting requirement, not a challenge to the relevant penalty. But the plaintiffs have not complied with the reporting requirement. They paid the penalty instead. Moreover, the relief the plaintiffs seek — invalidation of Notice 2007-83 — would provide them grounds for a refund of the penalty they paid, if their claims were correct. Accordingly, while the plaintiffs ostensibly seek only prospective relief in this action and, as explained below, have not pled the jurisdictional prerequisites for a refund suit, the plaintiffs in effect are challenging the penalty. See Fla. Bankers, 799 F.3d at 1069. The exclusive means for bringing such a challenge is a refund suit under 26 U.S.C. § 7422. See Brennan v. Southwest Airlines Co., 134 F.3d 1405, 1409 (9th Cir. 1998) (Internal Revenue Code provides “exclusive remedy” in § 7422 refund suits for judicial review of tax liability).

In a procedurally sound refund suit, the plaintiffs could challenge the § 6707A penalties assessed against them on any basis, including what they claim to be the IRS's failure to follow the APA in issuing Notice 2007-83. A refund suit, therefore, would provide the plaintiffs relief for the claims they assert here. In fact, in Interior Glass, the Ninth Circuit made clear that a refund suit is the proper vehicle for challenging § 6707A penalties for failing to disclose participation in a transaction designated as a listed transaction under Notice 2007-83. As the Ninth Circuit stated, the “important objective” of “voluntary disclosure of listed transactions” under Notice 2007-83 “could be jeopardized if full-scale pre-deprivation hearings and court cases are required whenever the government attempts to collect the authorized penalties.” 927 F.3d at 1087 (internal quotes omitted).

The plaintiffs in this case seek precisely this kind of pre-deprivation hearing with respect to future application of the Notice. But if the plaintiffs may proceed at all, they must do so through the specific mechanism Congress provided for challenging tax liability — a refund suit under § 7422. To bring such a suit, a taxpayer must first pay the tax at issue, file an administrative claim for credit or refund with the IRS, then bring the action in District Court based on an IRS denial or no action from the IRS. See 26 U.S.C. § 6532(a)(1); 26 C.F.R. § 301.6402-2. In Interior Glass, the Ninth Circuit held that this pay-first requirement for challenging Notice 2007-83 does not violate due process principles. See 927 F.3d at 1087. Moreover, in this case, having paid the penalty, the plaintiffs are in a position to bring a refund suit once they exhaust the prerequisite administrative process. While a refund suit is available to the plaintiffs, however, this action does not constitute a refund suit because they do not seek a refund and have not pled the jurisdictional prerequisites.

The plaintiffs thus cannot avoid the AIA's jurisdictional bar simply because they prefer not to take the statutory remedy available to them. See Alexander, 416 U.S. at 762 n.13 (“A taxpayer cannot render an available review procedure an inadequate remedy at law by voluntarily foregoing it.”); see also Hinck v. United States, 550 U.S. 501, 506 (2007) (a “precisely drawn, detailed statute pre-empts more general remedies”) (internal quotes omitted). Because this statutory remedy is available, the Regan exception to the AIA's jurisdictional bar does not apply.

B. The Exception in Williams Packing Does Not Apply.

Likewise, the other judicial exception to the AIA's bar, set forth in Williams Packing, 370 U.S. at 7, does not apply here. In Williams Packing, the Court held that the AIA does not bar a suit when the taxpayer can show that both of the following factors exist: (1) under no circumstances could the United States ultimately prevail, and (2) “equity jurisdiction” otherwise exists, i.e., the taxpayer has no adequate remedy at law and the denial of injunctive relief would cause immediate, irreparable harm. See Commissioner v. Shapiro, 424 U.S. 614, 627 (1976) (explaining Williams Packing factors). This case meets neither of the Williams Packing prongs.

1) The plaintiffs cannot show that under no circumstance could the United States prevail on the merits.

The first prong is exceedingly narrow. To satisfy it, the plaintiffs must demonstrate that “under the most liberal view of the law and the facts,” it is clear the United States could not ultimately prevail on the merits in any circumstance. Church of Scientology, 920 F.2d at 1486; see also United States v. American Friends Svc. Cmte., 419 U.S. 7, 10 (1974). The plaintiffs cannot meet this burden. As explained below, they cannot show certainty of success on their claims that Notice 2007-83 is procedurally defective, impermissibly vague, and issued in an arbitrary or capricious manner.

a) The plaintiffs cannot establish conclusively that the IRS did not follow proper procedures.

The plaintiffs claim that Notice 2007-83 is a “rule” subject to the APA's notice and comment requirements, which the IRS did not follow in issuing the Notice. See Compl. ¶¶ 128-34. Given the authority for, and history of, the reportable transaction procedures, however, the plaintiffs cannot show that under no circumstance could the United States prevail in asserting that the IRS was not obligated to engage in notice-and-comment rulemaking prior to designating the trust arrangements described in Notice 2007-83 as listed transactions.

As discussed above, in enacting the AJCA, which added § 6707A to the Code, Congress embraced the IRS's practice of designating reportable transactions, including listed transactions, by notice, rather than rulemaking. Section 6707A incorporated into the Code language from the § 6011 regulations regarding the designation of reportable transactions, defining a “reportable transaction” with reference to those regulations. See 26 U.S.C. § 6707A(c)(1). And the regulations, which went through notice-and-comment rulemaking, see 65 Fed. Reg. 11269, provide for the designation of “listed transactions” (a category of reportable transactions) through “notice, regulation, or other form of published guidance.” 26 C.F.R. § 1.6011-4(b)(2). Aware of the ever-changing landscape of tax shelters, Congress thus provided the IRS the ability to obtain critical information on the many variations of transactions that have the potential for tax avoidance. See H.R. Conf. Rep. 108-755, at 597 n.462 (Oct. 7, 2004) (explaining that the IRS may modify the definitions of “listed transaction” and “reportable transactions” as appropriate).

Applying notice and comment procedures to the IRS's designation of listed transactions before the IRS makes such designations, therefore, would undermine the regulatory program that Congress adopted in § 6707A and weaken the IRS's ability to obtain the information sought through such designations. As the Ninth Circuit has stated, the APA's notice and comment procedures should not hinder an agency in carrying out an effective regulatory program: “The APA was intended to impose procedural requirements on the adoption of rules; it is not a device by which an agency may be forced to adopt a less effective regulatory program in order to more effectively comply with notice and comment procedures.” Riverbend Farms, Inc. v. Madigan, 958 F.2d 1479, 1484 (9th Cir. 1992).

The United States thus has at least a colorable claim that Notice 2007-83 should not have been subject to notice and comment. To determine whether Congress has made an exception to the notice and comment procedures involves determining whether “Congress has established procedures so clearly different from those required by the APA that it must have intended to displace the norm.” Asiana Airlines v. FAA, 134 F.3d 393, 397 (D.C. Cir. 1998). In this case, Congress was aware of the existing IRS procedure for designating listed transactions by notice and must have known that requiring notice and comment for designations of listed transactions would undermine the regulatory program Congress was adopting. Congress thus defined a “listed transaction” as “a transaction specifically identified by the Secretary as a tax avoidance transaction.” 26 U.S.C. § 6707A(c)(2) (emphasis added). In doing so, Congress must have intended that listed transaction designations would not be subject to notice and comment.

The plaintiffs thus cannot meet their burden of showing that under no circumstance could the United States prevail against their claim that Notice 2007-83 should have gone through notice and comment. The procedures for designating reportable and listed transactions that Congress embraced indicate otherwise.

b) The plaintiffs cannot establish conclusively that Notice 2007-83 is impermissibly vague.

The plaintiffs likewise cannot meet their burden with respect to their claim that Notice 2007-83 does not describe the listed transactions with the requisite specificity, thereby violating the APA and due process principles. See Compl. ¶¶ 97-104, 118. On its face, and as the Ninth Circuit made clear in Interior Glass, Notice 2007-83 is not impermissibly vague.

Due process requires that statutes, regulations, and agency pronouncements define conduct that is subject to penalty “with sufficient definiteness that ordinary people can understand what conduct is prohibited[.]” Dimaya v. Lynch, 803 F.3d 1110, 1112 (9th Cir. 2015) (citing Kolender v. Lawson, 461 U.S. 352, 357 (1983)) (quotation omitted). That a definition fails to provide absolute certainty regarding the outermost boundaries of prohibited conduct thus does not render it void for vagueness. See Smith v. United States, 431 U.S. 291, 304-05, 308-09 (1977). Nor is a definition impermissibly vague simply if it may require a factual determination regarding whether certain conduct is, in fact, prohibited. See id. at 308-09. Rather, a definition is impermissibly vague only if it is “so vague and indefinite as really to be no rule or standard at all.” Ai v. United States, 809 F.3d 503, 514 (9th Cir. 2015) (quoting Boutilier v. INS, 387 U.S. 118, 123 (1967)).

In this case, Notice 2007-83 easily meets this standard. First, the Notice describes in plain terms the type of trust arrangements that it designates as listed transactions. See Notice 2007-83, 2007 WL 3015114, at *3-4. The Notice then lists four specific elements of such transactions. See id. at *9-13. Based on these specific elements, in addition to the Notice's lengthier explanation, the Notice provides a clear standard to determine whether a transaction involving a trust used to create a welfare benefit plan that includes a cash-value life insurance policy constitutes the type of transaction the Notice designates as a listed transaction.

The Ninth Circuit determined as much in Interior Glass. In that case, the taxpayer claimed that the IRS had improperly assessed § 6707A penalties against it for failure to disclose participation in a transaction substantially similar to the transaction described in Notice 2007-83, because, according to the taxpayer, it had not participated in a transaction like the one the Notice described. The taxpayer argued that if the term “substantially similar” could be read to include the transaction it had participated in, then that term was impermissibly vague. See Interior Glass, 927 F.3d at 1083, 1085. The Ninth Circuit rejected that argument. It held that a “'person of ordinary intelligence' could determine which transactions are substantially similar to the listed transaction identified in Notice 2007-83.” Id. at 1085. It follows that if a person of ordinary intelligence could determine which transactions are substantially similar to the transaction that Notice 2007-83 describes, then a person of ordinary intelligence could determine which transactions are the same as the transaction that the Notice describes. Moreover, as the District Court in Interior Glass noted, good reasons exist for the lack of any further specificity in the Notice, “given the creativity a taxpayer may employ in an effort to circumvent the statute.” Interior Glass Sys. v. United States, 2016 WL 4717765, at *7 (N.D. Cal. Aug. 12, 2016).

Particularly given the holding in Interior Glass, the plaintiffs cannot meet their burden on their vagueness claim.5

c) The plaintiffs cannot establish conclusively that Notice 2007-8 was issued in an arbitrary manner.

Finally, the plaintiffs also claim that the IRS issued Notice 2007-83 in an arbitrary and capricious manner. See Compl. ¶¶ 113-118. In issuing the Notice, however, the IRS followed the procedure that Congress established and provided ample reasons for designating the trust arrangements as listed transactions.

An agency's action is arbitrary and capricious within the meaning of the APA only if “the agency has [ ] relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” WildEarth Gardens v. EPA, 759 F.3d 1064, 1069-70 (9th Cir. 2014) (internal quotes omitted). Under this “highly deferential” standard, a court “may not substitute [its] judgment for that of the agency.” Kern Cnty. Farm Bureau v. Allen, 450 F.3d 1072, 1076 (9th Cir. 2006) (citing Marsh v. Oregon Nat. Res. Council, 490 U.S. 360, 376 (1989)).

Notice 2007-83 easily meets this standard. As discussed above, Congress vested the IRS with authority to determine the types of transactions it needs more information on to determine whether such transactions are being used for tax avoidance. In light of this authority, and in general, the IRS, not the taxpayer, determines what information it needs to fulfill its mission. See generally Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (1985). In this case, the IRS followed the procedure Congress established in § 6707A in designating the trust arrangements as listed transactions through Notice 2007-83. In doing so, the IRS has simply informed taxpayers that if they participate in such transactions, the IRS needs more information on them. Moreover, the Notice provides a detailed explanation of how these transactions can be used for tax avoidance and thus how they fit within the definition of “listed transaction.” See Notice 2007-83, 2007 WL 3015114, at *3-4.

On none of their claims, therefore, can the plaintiffs demonstrate that under no circumstance could the United States prevail. The first prong of the Williams Packing exception test is not met. The exception thus does not apply here.

2) The plaintiffs cannot show that “equity jurisdiction” exists.

Because the plaintiffs cannot establish certainty of success on the merits, the Court need not consider the second prong of the Williams Packing exception. In any event, the second prong is not met here either because the plaintiffs cannot show that “equity jurisdiction” otherwise exists, i.e., they have no adequate remedy at law and the denial of injunctive relief would cause immediate, irreparable harm.

As explained above, a refund action pursuant to § 7422 gives the plaintiffs an adequate remedy at law. Because the plaintiffs have such a remedy, the denial of injunctive relief would not result in irreparable harm. See Oebermann v. United States, 1990 WL 163556, at *1 (9th Cir. 1990) (“Oebermann is not facing 'irreparable harm' because he could sue for a refund pursuant to 26 U.S.C. § 7422.”); Stonecipher v. Bray, 653 F.2d 398, 401 (9th Cir.1981) (“[B]ecause Stonecipher can sue for a tax refund under I.R.C. § 7422, he has failed to satisfy the exception's second prong, requiring a showing of irreparable harm if injunctive relief is denied.”).

The judicial exceptions to the AIA's jurisdictional bar thus do not apply here.

III. THE COMPLAINT OTHERWISE STATES NO BASIS FOR SUBJECT MATTER JURISDICTION.

Given the jurisdictional bar that the AIA and tax exception to the DJA impose, the Complaint provides no basis for subject matter jurisdiction. As explained below, the APA does not otherwise provide an independent basis for jurisdiction. And the plaintiffs have not pled the jurisdictional requirements for a refund suit. The Court, therefore, has no basis for subject matter jurisdiction.

The Complaint asserts jurisdiction under 28 U.S.C. §§ 1331 and 1346(a)(2) (general federal question jurisdiction) and under the APA, 5 U.S.C. § 702. Compl. ¶ 10. “It is beyond question,” however, “that the APA does not provide an independent basis for subject matter jurisdiction in the district courts.” Allen v. Milas, 896 F.3d 1094 (9th Cir. 2018) (internal quotes omitted). Moreover, “before any review at all may be had [under the APA], a party must first clear the hurdle of § 701(a).” Heckler v. Chaney, 470 U.S. 821, 828 (1985). Section 701(a) provides that the APA's chapter on judicial review applies except to the extent that “statutes preclude judicial review” or “agency action is committed to agency discretion by law.” 5 U.S.C. § 701(a). Here, as explained above, the AIA and the DJA preclude judicial review of the plaintiffs' claims.

In addition, even if the AIA and DJA did not exist or apply, the plaintiffs could not bring their challenge under the APA because the APA permits judicial review only with respect to agency actions “for which there is no other adequate remedy in a court.” 5 U.S.C. § 704. In this case, as discussed above, a refund suit under 26 U.S.C. § 7422 provides the plaintiffs an adequate legal remedy to address the claims they have asserted here. In this action, therefore, the Court cannot review their claims under the APA.

While § 7422 provides the plaintiffs an adequate legal remedy, their Complaint has not pled that they have met the jurisdictional requirements for a § 7422 suit. As stated above, as a prerequisite to such a suit, § 7422 requires that a taxpayer first file an administrative claim for credit or refund with the IRS. See 26 C.F.R. § 301.6402-2. After filing a proper claim for refund, the taxpayer must wait until either the IRS responds or six months elapse without a response before the taxpayer can bring a refund suit in the District Court. See 26 U.S.C. § 6532(a)(1).

If a taxpayer does not exhaust this administrative remedy before bringing a refund suit in District Court, the court will lack subject matter jurisdiction to hear the suit. See 26 U.S.C. § 7422(a) and 26 C.F.R. § 301.6402-2(b)(1); see also Dunn & Black, P.S. v. United States, 492 F.3d 1084, 1090-91 (9th Cir. 2007) (stating that “§ 7422(a)'s requirement that a person first file an administrative claim before commencing an action against the United States in district court is a statutory limitation on Congress's express waiver of sovereign immunity pursuant to § 1346(a)(1)”). Because in this case, the plaintiffs have not pled that they exhausted their administrative remedy before bringing this action, even if this action could be construed as a § 7422 refund suit, the Court would have no jurisdiction over it.

For these reasons, the Court should dismiss this action for lack of subject matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(1).

CONCLUSION

For the foregoing reasons, the United States respectfully requests that the Court dismiss this action.

Dated: January 2, 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

FOOTNOTES

1Statutory references are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

2In 2002 and 2003, Treasury amended § 1.6011-4T to extend the reportable transaction requirements to individuals, trusts, partnerships, S corporations, and tax-exempt organizations, and to apply the requirements to (in addition to income tax) estate, gift, and excise taxes. See 67 Fed. Reg. 41324, 67 Fed. Reg. 64799, and 68 Fed. Reg. 10161.

3The Complaint does not specifically allege that the IRS assessed a penalty against Jeanette Govig or that she paid any penalty. The United States thus does not address any assessment or payment with respect to her.

4Given that the DJA's tax exception is at least as broad as the AIA, the United States will focus on the AIA, although the same arguments apply based on the DJA's tax exception.

5The plaintiffs also assert that Notice 2007-83 redefines the term “qualified cost” in a manner inconsistent with 26 C.F.R. § 1.409A-1(a)(5). See, e.g., Compl. ¶¶ 27, 106. Notice 2007-83, however, does not define, or address the definition of, “qualified cost.”

END FOOTNOTES

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