Taxpayers Urge Reversal of Transition Rules Challenge Dismissal

EVA MAZE, ET AL.,
Plaintiffs-Appellants,
v.
INTERNAL REVENUE SERVICE, ET AL.,
Defendants-Appellees.

ORAL ARGUMENT SCHEDULED FOR MAY 16, 2017

IN THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

 

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
(CIVIL ACTION NO. 15-1806 (CKK))

FINAL BRIEF OF APPELLANTS

George M. Clarke III
Lead Counsel
Joseph B. Judkins
Baker & McKenzie LLP
815 Connecticut Ave. NW
Washington, DC 20006
Tel: (202) 452-7000
Email: george.clarke@bakermckenzie.com
Counsel for Plaintiffs-Appellants

 

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

Plaintiffs certify as follows:

1. Parties and Amici.

Plaintiffs in the district court, Appellants here, are Eva Maze, Suzanne Batra, Margot Lichtenstein, Marie M. Green, May F. and Kevin A. Muench, and Nancy R. and Harold D. Blumenkrantz.

Defendants in the district court, Appellees here, are the Internal Revenue Service, John Koskinen in his official capacity as the Commissioner of Internal Revenue, and the United States of America.

2. Rulings Under Review.

The rulings under review are the order of the U.S. District Court for the District of Columbia (Kollar-Kotelly, J.) entered on July 25, 2016, and the accompanying memorandum opinion of the same date.

3. Related Cases.

This appeal involves two consolidated cases: Maze v. IRS, No. 15-cv-1806 (CKK), and Green v. IRS, No. 16-cv-1085 (CKK). To the best of their knowledge, counsel for Appellants are not aware of any previous or pending related cases in this or any other court.

STATEMENT REGARDING ORAL ARGUMENT

Appellants respectfully submit that oral argument in this case would be helpful to explain the terms and conditions of the several IRS programs at issue, including the various iterations of the voluntary disclosure program, the Transition Rules, and the Streamlined Procedures. Oral argument would also be helpful to explain why the Anti-Injunction Act does not apply to this suit.

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TABLE OF CONTENTS

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

STATEMENT REGARDING ORAL ARGUMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

GLOSSARY

JURISDICTIONAL STATEMENT

STATEMENT OF THE ISSUE

STATEMENT OF STATUTORY AND REGULATORY AUTHORITIES

STATEMENT OF THE CASE

STATEMENT OF FACTS

SUMMARY OF ARGUMENT

ARGUMENT

CONCLUSION

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

ADDENDUM

TABLE OF AUTHORITIES

Cases

Andrews v. United States, 805 F. Supp. 126 (W.D.N.Y. 1992)

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

Bradley v. United States, 410 U.S. 605 (1973)

Cheek v. United States, 498 U.S. 192 (1992)

City of Philadelphia v. The Collector, 72 U.S. 720 (1867)

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

Cutting v. Gilbert, 6 F. Cas. 1079 (C.C.S.D.N.Y. 1865)

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

Duncan v. Walker, 533 U.S. 167 (2001)

Emerson Inst. v. United States, 356 F.2d 824 (D.C. Cir. 1966)

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

FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000)

Florida Bankers Ass’n v. United States Dep’t of the Treasury, 799 F.3d 1065 (D.C. Cir. 2015)

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

Gardner v. United States, 211 F.3d 1305 (D.C. Cir. 2000)

Gen. Elec. Co. & Subs. v. United States, 384 F.3d 1307 (Fed. Cir. 2004)

Georgia v. Atkins, 10 F. Cas. 241 (C.C.N.D. Ga. 1866)

Hannewinkle v. Georgetown, 82 U.S. 547 (1873)

Henry v. United States, 251 U.S. 393 (1920)

Hertz Corp. v. Friend, 559 U.S. 77 (2010)

Hibbs v. Winn, 542 U.S. 88 (2004)

Howard v. Office of the Chief Admin. Officer of the United States House of Representatives, 720 F.3d 939 (D.C. Cir. 2013)

Jefferson Cty v. Acker, 527 U.S. 423 (1999)

Jones v. Liberty Glass Co., 332 U.S. 524 (1947)

K Mart Corp. v. Cartier, 486 U.S. 281 (1988)

King v. St. Vincent’s Hosp., 502 U.S. 215 (1991)

Kouichi Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct. 1997 (2012)

Lewis v. Reynolds, 284 U.S. 281 (1932)

Massachusetts v. Morash, 490 U.S. 107 (1989)

McNally v. United States, 483 U.S. 350 (1987)

Mechanics’ & Farmers’ Bank v. Townsend, 16 F. Cas. 1306 (C.C.S.D.N.Y. 1866)

Robinson v. Shell Oil Co., 519 U.S. 337 (1997)

Russell Motor Car Co. v. United States, 261 U.S. 514 (1923)

Sandifer v. U.S. Steel Corp., 134 S. Ct. 870 (2014)

Settles v. U.S. Parole Comm’n, 429 F.3d 1098 (D.C. Cir. 2005)

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

Shelton v. Platt, 139 U.S. 591 (1891)

Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996)

Smith v. City of Jackson, 544 U.S. 228 (2005)

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

States S.S. Co. v. IRS, 683 F.2d 1282 (9th Cir. 1982)

Tax Analysts and Advocates v. Shultz, 376 F. Supp. 889 (D.D.C. 1974)

United States v. Dalm, 494 U.S. 596 (1990)

United States v. Holroyd, 732 F.2d 1122 (2d Cir. 1984)

United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)

United States v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008)

United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (D. Va. 2010)

Yates v. United States, 135 S. Ct. 1074 (2015)

Z Street v. Koskinen, 791 F.3d 24 (D.C. Cir. 2015)

Statutes

5 U.S.C. §§ 701-706

26 U.S.C. § 170(c)(2)

26 U.S.C. § 6001

26 U.S.C. § 6015(e)

26 U.S.C. § 6015(e)(1)(B)(ii)

26 U.S.C. § 6046

26 U.S.C. § 6046A

26 U.S.C. § 6048(a)

26 U.S.C. § 6048(b)

26 U.S.C. § 6201

26 U.S.C. § 6203

26 U.S.C. § 6204(a)

26 U.S.C. § 6212

26 U.S.C. § 6212(a)

26 U.S.C. § 6212(c)

26 U.S.C. § 6213(a)

26 U.S.C. § 6225(b)

26 U.S.C. § 6232(c)

26 U.S.C. § 6246(b)

26 U.S.C. § 6301

26 U.S.C. § 6302

26 U.S.C. § 6303

26 U.S.C. § 6321

26 U.S.C. § 6330(e)(1)

26 U.S.C. § 6331

26 U.S.C. § 6331(i)

26 U.S.C. § 6501

26 U.S.C. § 6664

26 U.S.C. § 6672(c)

26 U.S.C. § 6694(c)

26 U.S.C. § 7121

26 U.S.C. § 7121(b)

26 U.S.C. § 7201

26 U.S.C. § 7421(a)

26 U.S.C. § 7426(a)

26 U.S.C. § 7426(b)(1)

26 U.S.C. § 7429(b)

26 U.S.C. § 7436

26 U.S.C. § 7436(d)

26 U.S.C. § 7601

26 U.S.C. § 7701(a)(11)(B)

28 U.S.C. § 129

28 U.S.C. § 133

28 U.S.C. § 1341

28 U.S.C. § 1391(e)(1)

28 U.S.C. § 2107(b)

28 U.S.C. § 2201

31 U.S.C. § 53146

31 U.S.C. § 532138

31 U.S.C. § 5321(a)(5)(B)

31 U.S.C. § 5321(a)(5)(C)

31 U.S.C. § 5321(a)(5)(D)

Act of July 1, 1862, ch. 119, §§ 7-14, 12 Stat. 432 (1862)

Act of July 1, 1862, ch. 119, §§ 19-21, 12 Stat. 432 (1862)

Act of March 2, 1867, ch. 169, § 10, 14 Stat. 471 (1867)

Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970)

Pub. L. 114-74, § 1101(f)(10), 129 Stat. 638 (Nov. 2, 2015)

Pub. L. 114-74, § 1101(g)(1), 129 Stat. 638 (Nov. 2, 2015)

Revenue Act of 1861, ch. 45, §§ 49, 50, 12 Stat. 292 (1861)

Revenue Act of 1866, ch. 184, § 19, 14 Stat. 98 (1866)

Other Authorities

2 Bouvier’s Law Dictionary (11th ed. 1866)

1 National Taxpayer Advocate, 2012 Annual Report to Congress

1 National Taxpayer Advocate, 2013 Annual Report to Congress

1 National Taxpayer Advocate, 2014 Annual Report to Congress

31 C.F.R. § 1010.306(c)

31 C.F.R. § 1010.350

Alison Bennett, Lied to IRS About Foreign Bank Account? Justice Is After You, Bloomberg BNA Daily Tax Report (Oct. 28, 2016)

Amanda Athanasiou, IRS Addresses Questions About OVDP and Streamlined Filing, Tax Notes Doc. No. 2014-26106 (Nov. 3, 2014)

Amy S. Elliott, IRS Answers Questions on Updated OVDP and Streamlined Filing, Tax Notes Doc. 2014-15503 (June 23, 2014)

Black’s Law Dictionary (8th ed. 2004)

Fed. R. App. P. 4(a)(1)(B)

Fed. R. Civ. P. 12(b)(1)

I.R.M. 4.26.16.6.5.1.3

I.R.S. Fact Sheet FS-2014-6 (June 2014)

I.R.S. Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedure (rev. Aug 2014)

I.R.S. News Release IR-2012-5 (Jan. 9, 2012)

I.R.S. News Release IR-2014-73 (June 18, 2014)

I.R.S. News Release IR-2016-137 (Oct. 21, 2016)

I.R.S., Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014, FAQ #4, https://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers-2012-revised (last visited Jan. 6, 2017)

I.R.S., Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2012, FAQ #7, https://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers (last visited Jan. 6, 20170<

I.R.S., Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2012, FAQ #9, https://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers (last visited Jan. 6, 2017)

I.R.S., Streamlined Filing Compliance Procedures, https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures (last visited Jan. 6, 2017)

I.R.S., Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States Frequently Asked Questions and Answers, FAQ #13, https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures-for-u-s-taxpayers-residing-in-the-united-states-frequently-asked-questions-and-answers (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #1, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #2, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #5, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #6, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #8, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., Transition Rules: Frequently Asked Questions (FAQs), FAQ #9, https://www.irs.gov/individuals/international-taxpayers/transition-rules-frequently-asked-questions-faqs (last visited Jan. 6, 2017)

I.R.S., U.S. Taxpayers Residing in the United States, https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-in-the-united-states (last visited Jan. 6, 2017)

J. Henry J. Friendly, Indiscretion About Discretion, 31 Emory L. J. 747 (1982)

Roger Foster and Everett V. Abbott, A Treatise on the Federal Income Tax Under the Act of 1894 (1895)

S. Rep. 75-1035 (1937)

Norman Singer & Shambie Singer, 2A Sutherland Statutes and Statutory Construction (7th ed. 2014)

Treas. Order 150-10 (Apr. 22, 1982)

United States Gov’t Accountability Off., GAO-16-720, Regulatory Guidance Processes: Treasury and OMB Need to Reevaluate Long-standing Exemptions of Tax Regulations and Guidance (2016)

Webster, Goodrich & Porter, Webster’s American Dictionary of the English Language (1864)

GLOSSARY

AIA	Anti-Injunction Act
APA	Administrative Procedure Act
FBAR	Report of Foreign Bank and Financial Accounts
OVDP	IRS Offshore Voluntary Disclosure Program
Streamlined Procedures	2014 IRS Streamlined Filing Compliance Procedures allowing individuals to cure non-willful noncompliance regarding reporting foreign assets
TIA	Tax Injunction Act
Transition Rules	IRS rules that apply to individuals participating in an offshore voluntary disclosure program who seek to move into the Streamlined Procedures while retaining some of the benefits of the offshore voluntary disclosure program
2009 OVDP	IRS Offshore Voluntary Disclosure Program that began on March 23, 2009
2011 OVDI	IRS Offshore Voluntary Disclosure Initiative that began on February 8, 2011
2012 OVDP	IRS Offshore Voluntary Disclosure Program that began on January 9, 2012, and was modified on June 18, 2014

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JURISDICTIONAL STATEMENT

Plaintiffs brought suit in the United States District Court for the District of Columbia to hold unlawful and set aside certain “Transition Rules” that the IRS issued in connection with its voluntary disclosure programs and to allow Plaintiffs to apply directly to another IRS program, the Streamlined Procedures. Plaintiffs’ cause of action arose under the Administrative Procedure Act, 5 U.S.C. §§ 701-706 (“APA”). The district court had subject-matter jurisdiction over the action pursuant to 28 U.S.C. § 1331 and venue pursuant to 28 U.S.C. § 1391(e)(1).

The IRS moved to dismiss the suit, and the district court granted that motion and entered final judgment in favor of the IRS with an accompanying memorandum opinion on July 25, 2016. Plaintiffs filed a notice of appeal on September 20, 2016, which was timely under 28 U.S.C. § 2107(b) and Fed. R. App. P. 4(a)(1)(B). This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

STATEMENT OF THE ISSUE

The Anti-Injunction Act, 26 U.S.C. § 7421(a) (“AIA”), prohibits suits brought “for the purpose of restraining the assessment or collection of any tax. . . .” Plaintiffs sued to be able to switch from one IRS program (voluntary disclosure) to another (the Streamlined Procedures), under which the IRS can fully audit, assess, and collect any tax (and any tax penalties) due under the law. The district court dismissed the case, concluding that Plaintiffs’ suit violates the AIA. Did the district court err in concluding that Plaintiffs’ suit restrains the assessment or collection of tax?

STATEMENT OF STATUTORY AND REGULATORY AUTHORITIES

The most pertinent statutory authority is the Anti-Injunction Act, 26 U.S.C. § 7421, which is reproduced in an Addendum to this brief.

STATEMENT OF THE CASE

This appeal concerns whether the AIA bars Plaintiffs’ suit to enjoin certain IRS rules — the Transition Rules — that prohibit Plaintiffs from participating in the Streamlined Procedures, an IRS program designed for individuals to remedy their past non-willful failure to report their foreign assets to the IRS. The Transition Rules are the sole impediment to Plaintiffs’ entry into the Streamlined Procedures. Plaintiffs sued to invalidate those rules and to be allowed to enter the Streamlined Procedures on the same footing as any other applicant. Once an individual has applied to the Streamlined Procedures, the IRS can exercise its discretion to audit, assess, and collect any tax — including penalties treated as taxes — under the law. Nothing prevents it from doing so. The applicant does not ultimately get the benefits of the Streamlined Procedures, including reduced penalties, until the IRS has determined that the applicant was not willful. And if the IRS determines that an applicant acted willfully, then the IRS can assess and collect all the taxes and penalties allowed by law. Thus, the remedy Plaintiffs seek will not stop the IRS from assessing and collecting any tax (or any tax penalty) from the Plaintiffs.

The reporting obligations that Plaintiffs did not comply with stem from the Bank Secrecy Act, which requires U.S. citizens to report their foreign accounts on a Report of Foreign Bank and Financial Accounts (“FBAR”). That reporting exists “so the government can better detect ‘bad actors’ engaged in tax evasion, terrorism, and money laundering.”¹ For individuals who had not reported their foreign assets, the IRS developed a series of offshore voluntary disclosure programs, which, in the words of the IRS Taxpayer Advocate Service, “applied a resource-intensive, burdensome, punitive, one-size-fits-all approach designed for ‘bad actors’ to ‘benign actors’ who inadvertently violated the rules.”²

Several of the individuals in this suit were born or lived much of their lives overseas. None of the Plaintiffs initially knew of the requirement to report their foreign assets and they historically failed to comply with the reporting rules governing offshore bank accounts. Even though this noncompliance was non-willful, in an attempt to be proactive and compliant, Plaintiffs entered one of the IRS’s voluntary disclosure programs — the only formal way available at the time to remedy their noncompliance.³ These programs offered certain protections. If an individual satisfied the terms of the programs, the individual received protection from criminal prosecution and a “closing agreement,” which precluded the IRS from auditing, assessing, or collecting additional taxes and penalties.

After Plaintiffs disclosed their foreign assets, the IRS announced a new program, the Streamlined Procedures,⁴ which allowed individuals who resided in the United States to cure their non-willful noncompliance by satisfying less stringent compliance burdens and by paying a smaller penalty. These advantages came with a price — under the Streamlined Procedures, if the IRS determined that a participant had acted willfully, the IRS reserved the right to audit, assess, and collect taxes and penalties and to seek criminal penalties as well.

The IRS also developed “Transition Rules” designed for individuals who had already entered an offshore voluntary disclosure program and who wished to receive the benefits of the Streamlined Procedures while also retaining some of the benefits of the offshore voluntary disclosure program. Because Plaintiffs did not act willfully, they did not need the protection from criminal prosecution or a closing agreement offered by voluntary disclosure, so they attempted to switch from the voluntary disclosure program to the Streamlined Procedures. These attempts were rebuffed. The IRS stated that the only way Plaintiffs could enter the Streamlined Procedures was through the Transition Rules. But these rules apply more onerous provisions for an individual “transitioning” than one applying anew.

Plaintiffs sued to invalidate the Transition Rules because the rules did not comply with the APA’s notice-and-comment rulemaking requirements or the requirement to provide a reasoned explanation for treating identically situated individuals differently. Defendants moved to dismiss for lack of subject-matter jurisdiction pursuant to the AIA and the Declaratory Judgment Act. Even though allowing Plaintiffs to directly enter the Streamlined Procedures would not prevent the IRS from assessing and collecting any and all tax, interest, and penalties available under the law, the district court dismissed the suit, concluding that the suit restrained the assessment and collection of tax in violation of the AIA. Plaintiffs filed a notice of appeal to this Court on September 20, 2016.

STATEMENT OF FACTS

I. Foreign Account Reporting Requirements.

To prevent criminals from using foreign bank accounts as tools for tax evasion, money laundering, and terrorism, Congress enacted the Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970), which requires U.S. residents, U.S. citizens, and other persons located and doing business in the United States to keep records and file reports regarding certain transactions or relationships with a foreign financial agency. 31 U.S.C. § 5314. The Treasury Department, which had cognizance over these reporting requirements, promulgated regulations requiring certain U.S. persons with a financial interest in a foreign account to file an FBAR for each calendar year in which that person maintains foreign financial accounts exceeding $10,000 (in the aggregate) during the previous calendar year. 31 C.F.R. §§ 1010.306(c), 1010.350. To enforce these requirements, Treasury may impose civil penalties, the amount of which turns on whether such failure was willful. If non-willful, then the penalty cannot exceed $10,000. 31 U.S.C. § 5321(a)(5)(B). If willful, the maximum penalty is increased to the greater of (i) $100,000 or (ii) 50% of the foreign-account balance at the time of the reporting failure. 31 U.S.C. § 5321(a)(5)(C)-(D).

II. Offshore Voluntary Disclosure Programs.

Beginning in 2009, the IRS implemented the first of “a series of offshore voluntary disclosure . . . programs to settle with taxpayers who had failed to report offshore income and file any related information return[s]. . . . ”⁵ The IRS set forth the requirements of these programs on its web site, changing them in 2011, 2012, and 2014⁶ by amending the guidance in answers to “frequently asked questions” and by gradually increasing the penalty amounts and the compliance burdens. The IRS also provided information about the programs in various press releases and in comments made at conferences.

Each program applied “a one-size-fits-all approach,” under which “bad actors” — i.e., those individuals who willfully concealed their foreign assets — were treated the same as “‘benign actors’ who inadvertently violated the rules.”⁷ In 2012, the IRS announced the Streamlined Procedures to treat non-willful actors differently than those who willfully failed to report their foreign assets. But it was not until 2014 that the IRS opened that program to U.S. residents.

A. The 2009 OVDP.

Among other things, the 2009 OVDP required applicants to:

(1) file original or amended returns and FBARs for the six tax years from 2003 to 2008;

(2) pay all unpaid taxes and interest, accuracy-related penalties, and certain other penalties for the six-year period covered by the voluntary disclosure; and

(3) pay an additional miscellaneous offshore penalty equal to 20% of the highest offshore account balance (plus the highest value of foreign assets) during the six-year period from 2003 to 2008. The miscellaneous offshore penalty was in lieu of all other penalties, including the 50% willful-FBAR penalty and various other information-return penalties.

The 2009 OVDP expired on October 15, 2009.

B. The 2011 OVDI.

Because the 2009 OVDP was so financially successful,⁸ the IRS announced the second iteration of the OVDP, the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”), on February 8, 2011. The 2011 OVDI included the same parameters as the 2009 OVDP, but it also imposed the additional requirements of:

(1) paying back-taxes, interest, and penalties for up to eight (rather than six) years; and

(2) paying an increased miscellaneous offshore penalty of 25% of the highest offshore account balance during the eight-year voluntary disclosure period.

The 2011 OVDI expired on September 9, 2011.⁹

C. The 2012 OVDP.

On January 9, 2012, the IRS announced a third iteration of the OVDP, which included the same general requirements as the 2011 OVDI but which increased the miscellaneous offshore penalty from 25% to 27.5% of the highest offshore account balance during the pertinent eight-year voluntary disclosure period.¹⁰

The IRS made the 2012 OVDP permanent until further notice or until the IRS modified it, which the IRS said could happen at any time.¹¹ Participants in the 2012 OVDP must sign a Form 906 closing agreement with the IRS, which is “final and conclusive” with respect to the tax liability of such individual and which forecloses the individual’s ability to file a refund suit. See 26 U.S.C. § 7121(b).¹²

D. Streamlined Filing Compliance Procedures.

On June 26, 2012, the IRS announced the first Streamlined Filing Compliance Procedures, which were available only to U.S. citizens living abroad who had failed to file tax returns or FBARs regarding their foreign assets and who presented a low compliance risk. Applicants were required to:

(1) file delinquent tax returns and related information returns for the past three years;

(2) file delinquent FBARs for the past six years; and

(3) pay any tax and interest due and owing.

Two years later, on June 18, 2014, the IRS announced an expanded Streamlined Filing Compliance Program — the Streamlined Procedures at issue here. For the first time, qualifying U.S. residents were eligible to participate.¹³ The Streamlined Procedures were specifically designed for individuals whose failure to report and pay tax on foreign assets was not willful and not criminal.¹⁴

The expanded Streamlined Procedures generally included the same requirements as the initial program, and it specifically required applicants to certify that their “failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct” — i.e., “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”¹⁵ Applicants also had to describe the “specific reasons for [their] failure to report all income, pay all tax, and submit all required information returns, including FBARs.”¹⁶ For eligible U.S. residents, the Streamlined Procedures reduced the miscellaneous offshore penalty to 5% of the highest aggregate balance of foreign accounts that are subject to the penalty.

The Streamlined Procedures generally do not impose accuracy-related penalties, information-return penalties, or FBAR penalties. Yet unlike the various voluntary disclosure programs, the Streamlined Procedures do not culminate in a closing agreement, and the IRS can audit and assess and collect any taxes owed with respect to (i) the tax returns submitted under the Streamlined Procedures and (ii) the tax returns for any other tax year that is still open for examination under the statute of limitations. The Streamlined Procedures do not protect participants from criminal prosecution, and participants may be subject to additional civil penalties and criminal liability if they lie in their submissions or otherwise are properly subject to such penalties or liability.¹⁷

E. The Transition Rules.

During 2014, the IRS issued “Transition Rules” for non-willful applicants who wished to “remain in the OVDP while taking advantage of the favorable penalty structure of the [Streamlined Procedures].”¹⁸ The Transition Rules apply to current voluntary disclosure participants — i.e., those individuals who had submitted the required materials before July 1, 2014, and had not yet completed the voluntary-disclosure-certification process or had opted out of the voluntary disclosure program but not yet received a letter initiating examination.¹⁹ These rules require an applicant to:

Under the Transition Rules, U.S. residents are not required to pay the miscellaneous offshore penalty at the voluntary disclosure rate and must pay only a decreased 5% miscellaneous offshore penalty.²¹ All other aspects of voluntary disclosure continue to apply, including: (i) the terms of the pertinent iteration of voluntary disclosure entered into by the applicant; (ii) the requirement to execute a closing agreement; and (iii) the requirement to pay all applicable accuracy-related, failure-to-file, and/or failure-to-pay penalties.²²

III. The Plaintiffs.

Several of the Plaintiffs were born overseas and lived much of their lives abroad. For instance, Eva Maze moved to the United States to escape the Nazi occupation of Romania during World War II. In 1948, she returned to Europe, where she lived until she returned to the United States in 2012. Similarly, Margot Lichtenstein is a dual citizen of the United States and Germany. In 1951, she married Boruch Lichtenstein who fled from his native Poland during the anti-Jewish pogroms. Marie Green was also born in Europe. She immigrated to the United States with her husband in November 1947 under special U.S. policies available for displaced Jewish Holocaust survivors. And May Muench was born in France and moved to the United States in 1983. Each of the Plaintiffs historically owned foreign assets or foreign bank accounts. And each one simply did not know of the requirement to report those foreign assets to the IRS.

Without exception, as soon as each of the Plaintiffs learned of the past errors in not reporting their foreign assets, each took immediate action to rectify that non-willful mistake. They did so by entering an IRS voluntary disclosure program.²³ Because these early programs did not distinguish “bad actors” from “benign actors,” Plaintiffs’ only choice was “to enter into a punitive offshore voluntary disclosure . . . program and either pay an ‘offshore penalty’ designed for ‘bad actors’ or ‘opt out’ and be examined.”²⁴ All of the Plaintiffs would have been eligible under the Streamlined Procedures, but those procedures were not available when they voluntarily disclosed their foreign accounts.

After the IRS announced the Streamlined Procedures, each of the Plaintiffs asked the IRS to withdraw from the voluntary disclosure program and to apply to directly enter the Streamlined Procedures. And each time they asked, the IRS refused, stating that they must follow the Transition Rules and cannot access the benefits of the Streamlined Procedures directly solely because they have already entered voluntary disclosure.

SUMMARY OF ARGUMENT

This case is about “the most basic principle of jurisprudence”: to “act alike in all cases of like nature.” J. Henry J. Friendly, Indiscretion About Discretion, 31 Emory L. J. 747, 758 (1982) (quoting and commenting on statement by Lord Mansfield). The IRS created two programs — voluntary disclosure and the Streamlined Procedures — to encourage compliance with respect to previously unreported foreign assets. It also created “Transition Rules” for individuals to move from the first to the second. But the Transition Rules impose greater filing and pre-payment burdens on individuals who disclosed earlier, thereby favoring identically situated individuals who delayed reporting and who waited until years later to voluntarily disclose their foreign assets. Plaintiffs, who made early disclosures under voluntary disclosure, sued to invalidate the Transition Rules, which the IRS issued without notice and comment, and which provided no explanation — reasoned or otherwise — for treating Plaintiffs worse than identically situated individuals who came forward later.

Through this suit, Plaintiffs seek only to enter the Streamlined Procedures on the same footing as any other individual who enters that program directly. Despite the IRS’s unfettered ability under those procedures to audit, assess, and collect any taxes due and owing, the district court concluded that the purpose of this suit was to restrain the IRS from assessing and collecting tax, so the AIA bars suit.²⁵ The district court specifically erred in concluding that:

First, the court misinterpreted the scope and application of the AIA. The district court concluded that “restraining” variously meant: “interfere” (Op. at 14); “increase the difficulty in” (Op. at 17); “be affected by” (Op. at 17); “burden” (Op. at 20-21, 23); “shift the burden” (Op. at 20-21); and “hamper” (Op. at 23). Under the AIA, “restraining” only means to stop. The district court’s contrary construction ignores the text and context of the AIA, is contrary to the AIA’s history and purpose, and contradicts the Supreme Court’s construction of the term in Direct Marketing. See Direct Mktg. v. Brohl, 135 S. Ct. 1124, 1133 (2015) (interpreting the same root word in a nearly identical statute).

Second, the Court misconstrued the terms of the Streamlined Procedures and the remedy that Plaintiffs requested. Unlike voluntary disclosure, under the Streamlined Procedures the IRS expressly reserves the right to assess and collect any and all tax owing under the law. Plaintiffs do not seek to, and this suit does not, stop the IRS from assessing or collecting a single dollar of tax under the normal procedures of the Internal Revenue Code. They ask only to leave the OVDP and directly enter the Streamlined Procedures without applying the discriminatory Transition Rules, which impose burdens that identically situated individuals who disclosed later do not face.

Third, the Court erroneously concluded that the Plaintiffs have an adequate remedy at law. They do not. There is no opportunity for consideration by IRS Appeals, any notice of deficiency would not address the FBAR penalties, and refund litigation is barred by statute — under the Transition Rules, each Plaintiff would be required to sign a closing agreement, which, under 26 U.S.C. § 7121, prohibits the filing of a refund suit.²⁶

Accordingly, this Court should reverse the district court’s order and remand for consideration of the merits.

ARGUMENT

I. Standard of Review.

This Court reviews de novo the district court’s decision on a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1). Howard v. Office of the Chief Admin. Officer of the United States House of Representatives, 720 F.3d 939, 945 (D.C. Cir. 2013).

II. The district court misinterpreted and misapplied the AIA.

The AIA prohibits suits brought for the purpose of “restraining the assessment or collection of any tax. . . .” Courts have long applied the AIA without determining the specific meaning of the word “restraining.” In most cases, they didn’t need to. For instance, in Bob Jones University v. Simon, 416 U.S. 725 (1974), the IRS acted to revoke a school’s tax-exempt status because the school maintained racially discriminatory admissions policies. The school sued, and the Supreme Court held that, because an injunction preventing the IRS from revoking that status “would necessarily preclude the collection of [employment taxes] and possibly income taxes from the affected organization, as well as the denial of § 170(c)(2) charitable deductions to donors to the organization, a suit seeking such relief falls squarely within the literal scope of the Act.” Id. at 732. Similarly, in Florida Bankers Association v. United States Dep’t of the Treasury, 799 F.3d 1065 (D.C. Cir. 2015), this Court concluded that the AIA barred a pre-enforcement challenge to regulations that required banks to report the accounts of foreign individuals. Violating those regulations would trigger a tax penalty, so this Court held that invalidating the regulation would “directly prevent collection of the tax.” Id. at 1071. In both cases, the Courts concluded that the AIA prohibited suits that stopped the assessment or collection of tax.

But if a suit doesn’t stop the assessment or collection of tax, the AIA doesn’t apply. For instance, in Cohen v. United States, 650 F.3d 717 (D.C. Cir. 2011), this Court concluded that the AIA did not bar a challenge to the IRS’s attempt to issue a notice that limited the ability of individuals to receive refunds of illegally collected excise taxes. There, the Government argued that the AIA should be interpreted expansively to prohibit any suit that affects tax liability. This Court expressly rejected the IRS’s vision of “a world in which no challenge to its actions is ever outside the closed loop of its taxing authority.” Id. at 726. Because the suit did not stop assessment or collection of the excise taxes at issue, this Court concluded that the AIA did not apply.

The district court’s opinion in the instant case brings the meaning of “restraining” to the forefront. Plaintiffs seek to apply to the Streamlined Procedures, under which the IRS retains the full power to audit, assess, and collect tax (and tax penalties). But the district court held that the AIA barred Plaintiffs’ suit. To justify this conclusion, the court interpreted “restraining” expansively to include any suit that affects the assessment or collection of tax, regardless of whether that suit actually stops the IRS from assessing or collecting tax.

In 2015, the Supreme Court determined the meaning of “restrain” in the Tax Injunction Act, 28 U.S.C. § 1341, which was modeled on and which has the same operative terms as the AIA. In Direct Marketing, the Court held that “restrain” means to “stop,” and “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.” Direct Mktg., 135 S. Ct. at 1133. The same holds true for the nearly identical terms of the AIA.

A. The AIA’s text shows that “restraining” means stopping.

1. The word “restraining” refers to a legal remedy.

To determine “[t]he plainness or ambiguity of statutory language,” courts refer “to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). “The meaning . . . of certain words or phrases may only become evident when placed in context.” FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000). “Rather than using terms in their everyday sense, ‘[t]he law uses familiar legal expressions in their familiar legal sense.’” Bradley v. United States, 410 U.S. 605, 609 (1973) (quoting Henry v. United States, 251 U.S. 393, 395 (1920)); Norman Singer & Shambie Singer, 2A Sutherland Statutes and Statutory Construction § 47:30 (7th ed. 2014) (“Legal terms in a statute have their legal meaning, absent legislative intent to the contrary, or other evidence of a different meaning, such as context or a statutory definition.”).

The plain text of the AIA shows that “restraining” is used in its legal sense to refer to the legal remedy resulting from the prohibited suit. 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. . . .” The prepositional phrase “for the purpose of restraining the assessment or collection of any tax” modifies “suit” and describes the purpose of the suit. The noun “suit” refers to a lawsuit. Black’s Law Dictionary 1475 (8th ed. 2004) (“suit” encompasses “[a]ny proceedings by a party or parties against another in a court of law”). The word “restraining” relates to the “purpose” of that lawsuit. Thus, the “purpose of” the prohibited “suit” relates to the legal remedy sought — i.e., a restraint on assessment or collection.

A “leading” legal dictionary²⁷ from 1866 defined a “restraint” as “[s]omething which prevents us from doing what we would desire to do.” 2 Bouvier’s Law Dictionary 471 (11th ed. 1866). In the AIA, the “suit” is the “something” that “prevents” the IRS from assessing and collecting tax. Accordingly, because “restraining” has meaning only insofar as it relates to the purpose of the prohibited “suit,” the most accurate meaning of the term is something that stops or prohibits an activity.²⁸ Textually, then, the word “restraining” in the AIA refers to a suit whose purpose is to stop assessment or collection.

2. The specific legal meaning of “assessment” and “collection” supports that interpretation.

As in the TIA, the word “restraining” in the AIA acts on “a carefully selected list of technical terms . . . not on an all-encompassing term, like ‘taxation.’” Direct Mktg., 135 S. Ct. at 1132. In particular, “restraining” acts on “assessment” and “collection.” “Assessment” is “the official recording of a taxpayer’s liability,” and “collection” is “the act of obtaining payment of taxes due.” Id. at 1130; 26 U.S.C. § 6203 (“The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary. . . .”); 26 U.S.C. § 6302 (describing the mode of tax collection). The district court’s sweeping construction erases the term “assessment” from the AIA and substitutes a much broader concept: anything that hampers taxation. Under that interpretation, “virtually any court action related to any phase of taxation,” Direct Mktg., 135 S. Ct. at 1132, might “hamper” collection of tax. Accordingly, the word “assessment” becomes mere surplusage, despite the fundamental canon that each word in a statute should have meaning. See, e.g., Duncan v. Walker, 533 U.S. 167, 174 (2001) (“We are thus ‘reluctant to treat statutory terms as surplusage’ in any setting.”) (citation omitted). To give meaning to both “assessment” and “collection,” and to determine the appropriate scope of the word “restraining,” that word should be accorded its narrow legal meaning such that only suits that stop assessment or collection are prohibited.

3. “Restraining” ordinarily meant stopping when Congress enacted the AIA.

The original definition of a word also informs its meaning. See, e.g., Sandifer v. U.S. Steel Corp., 134 S. Ct. 870, 879 (2014) (defining “changing” based on “two common meanings at the time of [the Fair Labor Standards Act’s] enactment”); Kouichi Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct. 1997, 2003 (2012) (defining “interpreter” based on definitions used “at the time of the statute’s enactment”). Even under the then-common definition of the word “restraining,” the district court’s interpretation misses the mark.

A widely used dictionary published in 1864, shortly before Congress enacted the first version of the AIA, defined “restrain” to mean:

Webster, Goodrich & Porter, Webster’s American Dictionary of the English Language 1128 (1864). These definitions denote a prohibition on action — “to hold back; to check; to hold from acting, proceeding, or advancing” — and a prevention of movement — “to limit; to confine; to restrict.” These definitions indicate that “restrain” — standing alone — means to stop. Thus, even taken out of its context as a legal term in the AIA, “restraining” is keyed to suits whose remedies stop the assessment or collection of tax.

B. The AIA as a whole confirms that restrain means to stop.

A statute must be read as a coherent whole. King v. St. Vincent’s Hosp., 502 U.S.215, 221 (1991) (applying “the cardinal rule that a statute is to be read as a whole”) (citing Massachusetts v. Morash, 490 U.S. 107, 115 (1989)). “In ascertaining the plain meaning of the statute, the court must look to the particular statutory language at issue, as well as the language and design of the statute as a whole.” K Mart Corp. v. Cartier, 486 U.S. 281, 291 (1988). When read in context, the AIA as a whole confirms that it uses “restraining” to mean stopping.

The AIA begins by listing at least twelve exceptions to the prohibition against suits whose purpose is to restrain the assessment or collection of tax:

Each of these exceptions relates to actions that stop the assessment or collection of tax. Most of the exceptions expressly authorize a court to stop the assessment or collection of tax — typically by injunction. None of the exceptions addresses a situation in which assessment or collection is merely “hamper[ed]” (Op. at 23), “burden[ed]” (Op. at 21), or impeded. The exceptions do not merely inhibit assessment or collection, they prohibit assessment and collection.²⁹

A rule that only has exceptions for suits that stop assessment and collection is a rule that only is concerned with suits that stop assessment and collection. A suit to restrain the assessment or collection of tax must be a suit that enjoins assessment or collection, not one that might merely impede or “hamper” assessment or collection, as the district court suggests. Construing the AIA as an integrated whole confirms that “restraining” means to stop.

C. The history of the AIA confirms that “restraining” relates to the equitable remedy of injunction.

Although the AIA “apparently has no recorded legislative history,” Bob Jones Univ., 416 U.S. at 736, the historical context in which it arose shows that Congress was responding to a series of lawsuits brought in equity to enjoin the assessment or collection of tax. “When the income tax was first imposed during the civil war, a number of applications were made for injunctions against assessment or collection of the taxes it imposed. To prevent this practice, Congress inserted a section in the Act of March 2d, 1867. . . .” Roger Foster and Everett V. Abbott, A Treatise on the Federal Income Tax Under the Act of 1894, 231 (1895). The Civil War income tax established a regime in which the President appointed local assessors and collectors to enforce the tax. Revenue Act of 1861, ch. 45, §§ 49, 50, 12 Stat. 292, 309. The assessors received tax payments and made lists of tax liabilities. Act of July 1, 1862, ch. 119, §§ 7-14, 12 Stat. 432, 434-36. The assessors provided the tax lists to the collectors, who gave notice and demand for payment of outstanding tax liabilities. Id. at §§ 18-19, 12 Stat. 438-40. If the taxes listed as due were not paid, the collectors could seize and sell personal and real property to satisfy the tax liability. Id. at §§ 19-21, 12 Stat. 439-41.

In 1866, Congress expressly gave taxpayers the right to sue collectors for refunds of tax that had been unlawfully collected. Revenue Act of 1866, ch. 184, § 19, 14 Stat. 98, 152. See also City of Philadelphia v. The Collector, 72 U.S. 720 (1867) (recognizing implicit right to sue for refund of illegal tax). This gave the taxpayer a legal remedy for recovering funds paid to collectors, but only in the context of a refund suit. Because taxpayers did not have a legal remedy against unlawful assessments, taxpayers sued in equity for a “bill to restrain” the assessment or collection of illegal tax. See, e.g., Cutting v. Gilbert, 6 F. Cas. 1079 (C.C.S.D.N.Y. 1865) (Nelson, J.) (suit for a “writ of injunction” to “stay the assessment and collection” of tax due on stock sales); Mechanics’ & Farmers’ Bank v. Townsend, 16 F. Cas. 1306, 1306 (C.C.S.D.N.Y. 1866) (“assessors and collector” were “restrained by the instillation of . . . suit and injunction”) (quoting 3 Int. Rev. Rec. 143) (emphasis added); Georgia v. Atkins, 10 F. Cas. 241 (C.C.N.D. Ga. 1866) (suit for a “bill in equity . . . praying that a writ of injunction may be granted to restrain” the collector from collecting tax) (emphasis added). Accordingly, Congress again amended the income tax laws to provide that “no suit for the purpose of restraining the assessment or collection of tax shall be maintained in any court.” Act of March 2, 1867, ch. 169, § 10, 14 Stat. 471, 475 (1867).

Thus, Congress intended the AIA to prohibit suits in equity that sought a “bill to restrain” the collection or assessment of tax.³⁰ The Supreme Court has expressly recognized that the AIA uses “restrain” in “its equitable sense.” Direct Mktg., 135 S.Ct. at 1133. Through the AIA, Congress meant to address a specific issue — suits in equity brought to enjoin assessment or collection; it never intended to preclude any suit holding the IRS to the rule of law.

D. “Restraining” in the AIA means the same thing as “restrain” in the TIA.

1. The Supreme Court has held that “restrain” means “stop.”

“[W]hen Congress uses the same language in two statutes having similar purposes, . . . it is appropriate to presume that Congress intended that text to have the same meaning in both statutes.” Smith v. City of Jackson, 544 U.S. 228, 233 (2005). The nearly identical text and very similar purpose of the TIA reinforce the conclusion that restrain means stop. Indeed, in Direct Marketing, the Supreme Court used the AIA as a reference point for defining “restrain” under the TIA and concluded that “restrain” means “[t]o prohibit from action; to put compulsion upon . . . to enjoin.” Direct Mktg., 135 S.Ct. at 1132 (quoting Black’s Law Dictionary (3d ed. 1933)).

“Just as the AIA shields federal tax collections from federal-court injunctions, so the TIA shields state tax collections from federal-court restraints.” Hibbs v. Winn, 542 U.S. 88, 104 (2004); Jefferson Cty. v. Acker, 527 U.S. 423, 434 (1999) (the AIA is a federal statute “of similar import” to the TIA) (quoting S. Rep. 75-1035, at 1 (1937)). The TIA “was . . . shaped by state and federal provisions [i.e., the AIA] barring anticipatory actions by taxpayers to stop the tax collector from initiating collection proceedings.” Jefferson Cty., 527 U.S. at 435 (emphasis added). Thus, both the AIA and the TIA share a common purpose of prohibiting suits that seek an injunction to stop the assessment and collection of tax.

Because the AIA and the TIA share common terms and a common purpose, the essentially identical terms in each should be interpreted in the same way. The Supreme Court has long interpreted the AIA and the TIA in concert. In Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 6 (1962), the Court used “[t]he enactment of the comparable Tax Injunction Act of 1937. . . [to] throw[] light on the proper construction to be given § 7421(a) [the Anti-Injunction Act].” In Jefferson County, 527 U.S. at 434, the Court made clear that Congress “modeled” the TIA on the AIA. And in Direct Marketing, 135 S. Ct. at 1129, the Supreme Court “assume[d] that words used in both Acts [the TIA and the AIA] are generally used in the same way. . . .” Thus, consistent with longstanding precedent, the Supreme Court’s interpretation of “restrain” under the TIA applies equally to the meaning of “restraining” for purposes of the AIA, which reinforces the conclusion that “restraining” in the AIA means to stop. See also Fredrickson v. Starbucks Corp., 840 F.3d 1119 (9th Cir. 2016) (concluding that restrain means “stop” under the TIA and applying the same analytical framework to an issue under the AIA).

2. The district court mistakenly distinguished the nearly identical terms of the TIA and the AIA.

Although the Supreme Court interprets the TIA and the AIA in harmony, the district court nonetheless tried to distinguish the TIA and the AIA, stating that the same term — restrain — means something different in these largely identical statutes because “the specific language of the Tax Injunction Act . . . differs in material respects from the language of the Anti-Injunction Act.” Op. at 27. In particular, the AIA lacks the terms “suspend” and “enjoin.” Because “restraining” “keeps no such company” in the AIA the district court concluded that the word “restraining” there had a vastly different and much more expansive definition than the same root word in the TIA. Op. at 27.

This Court has previously rejected that argument. In Z Street v. Koskinen, 791 F.3d 24, 30-31 (D.C. Cir. 2015), the Court concluded that even though “enjoin” and suspend” don’t appear in the AIA, the Supreme Court’s conclusion that “words used in both Acts are generally used in the same way,” Direct Marketing, 135 S.Ct. at 1129, supported interpreting “restraining” in the AIA the same as “restrain” in the TIA.

Moreover, to reach its erroneous conclusion, the district court critically misapplied the interpretive principle that a word is known by the company it keeps. That canon is merely a tool for resolving ambiguity. Russell Motor Car Co. v. United States, 261 U.S. 514, 519 (1923). It cannot “be used to create but only to remove doubt.” Id. (emphasis added). The absence of “suspend” and “enjoin” cannot cause “restrain” to mean something different in these nearly identical statutes. Cf. Op. at 27. A word that the Supreme Court held meant “to stop” doesn’t take on the additional meanings of “burden,” “hamper,” and “interfere with” (among other things) simply because it is unaccompanied by “suspend” and “enjoin.” The district court’s contrary conclusion simply creates ambiguity about the scope of “restraining” and the application of the AIA — which is exactly how the canon should not be used. See Yates v. United States, 135 S. Ct. 1074, 1097 (2015) (Kagan, J., dissenting) (“As an initial matter, this Court uses noscitur a sociis . . . to resolve ambiguity, not create it.”).

By blurring the boundaries of the AIA, the district court also violated the fundamental rule that jurisdictional statutes should be clear. Direct Mktg., 135 S. Ct. at 1131 (describing the “rule favoring clear boundaries in the interpretation of jurisdictional statutes”) (citing Hertz Corp. v. Friend, 559 U.S. 77, 94 (2010)). This Court has held that the AIA is a jurisdictional statute. Seven-Sky v. Holder, 661 F.3d 1, 5 (D.C. Cir. 2011) (citing Gardner v. United States, 211 F.3d 1305, 1311 (D.C. Cir. 2000)). But the district court’s expansive, limitless, and shifting interpretation of “restraining” fosters uncertainty and undermines the rule favoring clear jurisdictional boundaries.³¹

III. This suit does not restrain the IRS from assessing or collecting tax.

The AIA does not apply here because the IRS is free to assess and collect tax from the Plaintiffs under the Streamlined Procedures. The court below misconstrued the terms of the Streamlined Procedures and the Plaintiffs’ request for relief. The court mistakenly believed that allowing the Plaintiffs to directly enter the Streamlined Procedures could restrain the IRS from collecting and assessing tax. It cannot.

A. The Streamlined Procedures do not stop the IRS from assessing or collecting taxes.

As a threshold matter, entering the Streamlined Procedures does not restrain the IRS’s ability to assess or collect tax. The IRS administers the Streamlined Procedures and acts as a gatekeeper. Only individuals whose failure to file was non-willful will ultimately be accepted. Applicants must provide to the IRS certain documentation, including a statement of non-willfulness that explains the facts and circumstances surrounding the prior non-disclosure of foreign assets. If an applicant acted willfully, or if the applicant does not comply with the terms of the Streamlined Procedures, then the IRS retains full discretion to audit the tax years at issue and determine a deficiency for any tax, penalties, and interest due under its normal examining authority. Indeed, the IRS expressly reserves discretion to audit individuals and to assert additional civil and criminal penalties under the Streamlined Procedures even after an individual has been accepted into the program:

Simply put, nothing in the Streamlined Procedures stops the IRS from auditing, assessing, and collecting additional tax, penalties, and interest — even after the IRS has accepted an applicant into the program. So the IRS can — if it chooses — audit, assess, or collect any tax under the three years to which the Streamlined Procedures apply and, to the full extent allowed by law, the additional five years that apply under the voluntary disclosure program.

Yet the district court nonetheless concluded that Plaintiffs’ suit seeking entry into the Streamlined Procedures was maintained for the purpose of restraining the assessment and collection of tax. In essence, the district court concluded that, because there are differences between the Transition Rules and the Streamlined Procedures, Plaintiffs’ suit restrained the assessment or collection of tax and thus was barred by the AIA. To reach that conclusion, the district court focused on three differences between the Transition Rules and the Streamlined Procedures:

To the extent these are restrictions on assessment and collection, this suit is not responsible for any of them.

1. Neither this suit nor the Streamlined Procedures restrains IRS action.

The IRS designed the Streamlined Procedures for individuals whose failure to report their foreign assets was non-willful. Under the law, if an individual did not willfully fail to file an FBAR, the maximum penalty is $10,000. 31 U.S.C. § 5321(a)(5)(B). The IRS would have no ability to collect more than that. Similarly, under the law, if an individual did not fraudulently file her tax returns or omit a very large amount of income, the period of limitations is three years. See generally 26 U.S.C. § 6501. Likewise, although accuracy-related penalties and various other penalties could apply,³⁷ those penalties would be limited if the individual had reasonable cause for the failure. 26 U.S.C. § 6664. Under the Streamlined Procedures, the IRS has chosen to limit the applicant’s filing requirement to the back three years and, in lieu of the FBAR, accuracy-related and other penalties, to impose a miscellaneous offshore penalty of 5% of the value of the participant’s foreign assets. The IRS’s own rules implement these terms,³⁸ which are likely a reflection of the fact that applicants are non-willful and the amount of tax and penalties to be collected under the law would therefore be limited. In any event, these “restrictions” are not caused by this suit; they are caused by the IRS’s own program. Yet the district court nonetheless determined that “the reduced-value compromise of these several penalties constitutes a restraint on the assessment or collection of taxes.” Op. at 18. That conclusion is wrong for at least three reasons.

First, the district court misapplied the AIA, which prohibits suits that stop the assessment or collection of tax. Plaintiffs simply ask to be treated the same as every other individual who applies directly to the Streamlined Procedures. Under those procedures, the IRS retains complete authority to audit, assess, and collect any tax — including any penalty treated as tax — under the law. Any remedy from this lawsuit, including the opportunity to apply to directly enter the Streamlined Procedures, would not stop the IRS from assessing or collecting any tax (or any tax penalty) that it is otherwise authorized to assess and collect under the law.

Second, to the extent it could have even collected them under the law, the IRS has “compromised” these penalties for every one of the thousands of people allowed to directly enter the Streamlined Procedures. The IRS has “compromised” these penalties for individuals just like the Plaintiffs: i.e., individuals who did not willfully fail to report their foreign assets and thus as to whom the law likely would not have allowed the penalties to be collected in the first instance. The rules the IRS applies cannot be a reasonable compromise for one group of non-willful individuals but a restraint on assessment and collection of tax for an identical group of non-willful individuals.

Third, the district court mistakenly determined that the pertinent comparison was between the 27.5% miscellaneous offshore penalty under the 2012 OVDP and the 5% miscellaneous offshore penalty under the Streamlined Procedures. Op. at 18.The district court premised this comparison on the assumption that “[i]t is yet unclear whether Plaintiffs would even qualify for the Transition Treatment.” Op. at n.10. That premise is faulty because the district court should have assumed the more favorable fact — i.e., that Plaintiffs would qualify under the Transition Rules. “At the motion to dismiss stage, . . . complaints . . . are to be construed with sufficient liberality to afford all possible inferences favorable to the pleader on allegations of fact.” Settles v. U.S. Parole Comm’n, 429 F.3d 1098, 1106 (D.C. Cir. 2005). Assuming that Plaintiffs qualified under the Transition Rules, for domestic residents, the miscellaneous offshore penalty is the same amount under both the Transition Rules and the Streamlined Procedures.³⁹ So even if reducing the miscellaneous offshore penalty constituted a restraint — and it does not — there’s no restraint here.

2. This suit does not shift the burden of assessment or collection to the IRS.

Under the Internal Revenue Code, the IRS has the duty to assess and collect income tax. 26 U.S.C. § 6201 (“[t]he Secretary is authorized and required to make . . . assessments of all taxes. . . .”); 26 U.S.C. § 6301 (describing the Treasury Secretary’s authority to collect tax); see also Emerson Inst. v. United States, 356 F.2d 824, 827 (D.C. Cir. 1966) (the IRS has the “right and duty to assess and collect taxes”); United States v. Holroyd, 732 F.2d 1122, 1125 (2d Cir. 1984) (the IRS has a “paramount duty to assess and collect taxes”). Despite this statutory duty to assess and collect tax, the district court concluded that Plaintiffs’ suit constitutes a restraint under the AIA because it “shifts the burden” to the IRS for receiving tax returns for all eight years under the OVDP (Op. at 19) and for collecting unpaid tax for those years (Op. at 19-20). The district court concluded that “the substantial increase in the difficulty in the collection of those penalties constitutes a restraint on the assessment and collection of unpaid taxes, as well.” Op. at 17. To the extent that auditing, assessing, and collecting tax imposes a “burden” on the IRS, Congress imposed that “burden” on the IRS.⁴⁰ This suit does not alter the basic statutory duty to assess and collect tax; it does not “shift” the duty to that agency because the IRS had that duty all along.

Furthermore, this suit does not stop the IRS from assessing or collecting any tax (and any penalty treated as tax), including tax from the three years under the Streamlined Procedures and from the additional five years under the voluntary disclosure program. As explained above, the AIA applies only to suits that stop the assessment or collection of tax. Allowing Plaintiffs to directly enter the Streamlined Procedures means only that the plain terms of those procedures apply to Plaintiffs — just as they would to any other individual who directly entered the program. So the IRS can — if it chooses to do so and does so in a non-discriminatory way — audit, assess, or collect any tax under the Streamlined Procedures or with respect to any of the additional five years covered by the voluntary disclosure program. To the extent this is a “burden” or “increase in difficulty” compared to voluntary disclosure, such burden or increase in difficulty arises from the IRS’s procedures — not from this lawsuit. The AIA asks whether a suit restrains the “collection or assessment” of tax. The remedy under this suit does not restrain the normal operation of the procedures in the Internal Revenue Code. In every instance, the IRS has the authority to audit returns. 26 U.S.C. §§ 6001, 7601. Thus, the relevant comparison is not between the voluntary disclosure program and the Streamlined Procedures. Instead, the question is whether the suit restrains tax relative to the normal operation of the law. This one doesn’t. See 26 U.S.C. §§ 6203, 6204(a), 6301, 6303, 6321, 6331.

Finally, far from being hindered, the Streamlined Procedures give the IRS the advantage of the individual’s detailed statement regarding previously unreported foreign assets. These non-willfulness statements describe the facts and circumstances surrounding the prior non-disclosure, including:

(1) the specific reasons for not reporting all income, paying all tax, and filing all required information returns;

(2) an explanation of the source of the funds in the foreign accounts; and

(3) an explanation of the individual’s contacts with the foreign assets, including withdrawals, deposits, and investment management decisions.⁴¹

In addition, the Streamlined Procedures form — Form 14654 — identifies and describes each of the specific foreign assets at issue and sets forth the amounts in the foreign accounts. It also provides the tax and interest computations for the foreign assets at issue.

Thus, in completing the Streamlined Procedures form, and in preparing and submitting the non-willfulness statement, the applicant does much of the IRS’s auditing work for it. In the typical case under the law, the IRS would know none of those things and would receive only a standard tax return, leaving the IRS to determine whether further investigation was warranted. Far from “substantially increas[ing] the difficulty” of assessing and collecting tax, the IRS has several significant advantages under the Streamlined Procedures that it lacks under the law. Cf. Tax Analysts and Advocates v. Shultz, 376 F. Supp. 889, 892 (D.D.C. 1974) (AIA does not apply if suit encourages assessment and collection of tax), quoted approvingly in Hibbs, 542 U.S. at 103. Accordingly, this suit does not “burden” the IRS. To the extent there are burdens, they are caused by the law and the IRS itself.

B. This suit does not shift the burden of proving willfulness to the IRS — the IRS always has that burden.

The majority of the “willful” activity that the Streamlined Procedures and the OVDP refer to is the willful failure to file an FBAR.⁴² See 31 U.S.C. § 5321(a)(5)(C) (penalty for the willful failure to file an FBAR). And it is the IRS — not the individual — that always has the burden to prove the willful failure to report foreign assets. See United States v. McBride, 908 F. Supp. 2d 1186, 1202 (D. Utah 2012) (“The United States bears the burden of proving that McBride willfully failed to file FBARs. . . .”); United States v. Williams, 2010 U.S. Dist. LEXIS 90794 at *17 (D. Va. 2010) (same), rev’d on other grounds, 489 Fed. Appx. 655 (4th Cir. 2012). That burden applies not only in litigation, but also in administrative proceedings. See I.R.M. 4.26.16.6.5.1.3 (Nov. 6, 2015) (directing IRS auditors that for willful FBAR violations, “[t]he burden of establishing willfulness is on the Service”).

The district court recognized that “the standard IRS procedures . . . necessarily place[] the burden on the IRS for showing willfulness.” Op. at 22.⁴³ Yet the court nonetheless concluded that Plaintiffs’ suit would “shift the burden to the IRS for finding willfulness” (Op. at 22) because under the Transition Rules, individuals “must convince the IRS that their activity was not willful” (Op. at 21), whereas under the Streamlined Procedures, “the taxpayer must simply certify non-willfulness.” Op. at 21. Based on this difference in IRS procedure, the district court concluded that, under the AIA, this suit restrains the IRS because “the IRS’s treatment of this information is materially different.” Op. at 21.

The district court erred because the ultimate “burden” on the IRS to prove willfulness is the same under both the Transition Rules and the Streamlined Procedures — moving from one to the other does not “shift” the burden. In both cases, an individual prepares and submits a statement describing the absence of willfulness.⁴⁴ In both cases, the IRS reviews the same information — the statement of non-willfulness and the surrounding facts and circumstances. And in both cases, the IRS has the option to further scrutinize the facts and circumstances to determine whether there is evidence of willfulness.⁴⁵ Indeed, the district court stated that “the requirement that taxpayers certify non-willfulness is common to the Transition Treatment and to direct participation in the 2014 Streamlined Procedures. . . .” Op. at 21. But because the IRS chose to “treat” the non-willfulness statement differently, the district court erroneously concluded that this suit restrained the assessment and collection of tax. The IRS’s “treatment” of the materials is a matter of agency choice — it does not stop the IRS from assessing or collecting any tax. And, in any event, even if the burden were shifted — and it is not — that would not stop the IRS from assessing or collecting any tax. In short, the IRS always has the burden of proving willfulness; nothing about this suit “shifts” that burden or stops the IRS from assessing or collecting tax.

C. The district court erred in construing facts against the Plaintiffs on this motion to dismiss.

“At the motion to dismiss stage, . . . complaints . . . are to be construed with sufficient liberality to afford all possible inferences favorable to the pleader on allegations of fact.” Settles v. U.S. Parole Comm’n, 429 F.3d 1098, 1106 (D.C. Cir. 2005). The district court repeatedly took the opposite approach. Specifically, the court concluded that Plaintiffs sought “to retain benefits that are available only under the OVDP, specifically assurances from the IRS regarding the referral of matters for criminal prosecution for past tax years.” Op. at 11. This is incorrect. Plaintiffs entered into the voluntary disclosure program because it was the only program available to them when they first learned of their reporting obligations. It is not their fault that the program treated willful and non-willful individuals exactly the same.⁴⁶ Even though the Plaintiffs did not act willfully, they still wanted to voluntarily disclose their previous mistakes. (In fact, Mrs. Batra disclosed when there was no formal voluntary disclosure program, and the IRS subsequently inserted her into the 2011 OVDI.) Because the Plaintiffs were not willful, they did not seek — and do not need — “non-prosecution” letters. Contrary to the district court’s statements, Plaintiffs expressly acknowledged that they were “per se ineligible for the benefits of OVDP if they are allowed to directly enter the Streamlined Procedures.” Pl. Br. at 21. They also never asked for — or expected to receive — a closing agreement under the Streamlined Procedures. Plaintiffs know that participating in the Streamlined Procedures does “not culminate in the signing of a closing agreement with the IRS.”⁴⁷

The district court also concluded, without explanation, that Plaintiffs were not “willing to undergo IRS examination with respect to [the additional five years at issue under the voluntary disclosure program].” Op. at 20. This is also incorrect. Plaintiffs explicitly asked to withdraw from the voluntary disclosure program and to directly enter the Streamlined Procedures, under which “the IRS must treat them the same as any other [Streamlined Procedures] applications.” Maze Complaint, 26; Green Complaint, 28. Under the Streamlined Procedures, the IRS expressly reserves the right to audit, assess, and collect taxes due and owing. Neither this suit nor the Streamlined Procedures prohibits the IRS from auditing, assessing, or collecting tax for any prior year.

Plaintiffs do not ask to remain in the voluntary disclosure program. They do not ask for a closing agreement. They do not ask for a “non-prosecution” letter. They understand that under the Streamlined Procedures they may be subject to audit and the assessment and collection of any taxes and any tax penalties allowed under the law. Plaintiffs do not ask for special treatment. They ask only to be treated the same as every other person who directly enters the Streamlined Procedures — no better and no worse.

IV. The AIA does not apply because Plaintiffs lack an adequate remedy at law.

The AIA does not apply if a plaintiff has no adequate remedy at law. “Congress did not intend the [AIA] to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy.” South Carolina v. Regan, 465 U.S. 367, 378 (1984).

The district court held that Plaintiffs had an adequate remedy at law — they could either (i) “pursue a settlement with the IRS independent of the established voluntary disclosure programs and, if those settlement talks fail, . . . pay the full assessed liabilities and seek a refund through a refund suit”; or (ii) “opt-out of the OVDP, allow the IRS to determine their liabilities by examination, pay the assessed liabilities, and file an administrative claim for a refund for the difference between the liability determined and the amount that would be due under the Streamlined Procedures; if that administrative refund claim is denied, they may then file a refund suit in federal court.” Op. at 29.

In tax refund litigation, “[a]n overpayment must appear before refund is authorized.” Lewis v. Reynolds, 284 U.S. 281, 283 (1932). An overpayment is “any payment in excess of that which is properly due.” Jones v. Liberty Glass Co., 332 U.S. 524, 531 (1947); see also United States v. Dalm, 494 U.S. 596, 609 n.6 (1990) (“a tax is overpaid when a taxpayer pays more than is owed”). The provisions of the Internal Revenue Code determine the proper amount of tax due and owing. Gen. Elec. Co. & Subs. v. United States, 384 F.3d 1307, 1312 (Fed. Cir. 2004) (“an overpayment is a payment that relates to a tax obligation”). Accordingly, in any refund litigation, the issue will be whether the Plaintiffs have paid the correct amount of tax due under the Code — not whether they have paid the amount due under a voluntary disclosure program. Cf. Andrews v. United States, 805 F. Supp. 126, 131, 132 (W.D.N.Y. 1992) (individuals who alleged that they paid more than they owed “based on incorrect information provided by the IRS” could not “show an entitlement under the Internal Revenue Code to the refund they seek”). Thus, the focus of the litigation would be solely on the correctness of the tax liability — not on the validity of the Transition Rules.

Moreover, by taking either path that the district court described, Plaintiffs will have waived any application of the OVDP, the Transition Rules, or the Streamlined Procedures. Because these programs are purely voluntary, individuals waive their right to participate unless they take affirmative steps to do so. By settling or paying outside of the programs, Plaintiffs would waive their rights under the programs and be barred from raising any claims regarding the provisions of the programs. Any APA challenge would be moot.

Likewise, if Plaintiffs remain within the voluntary disclosure program, Plaintiffs would be barred from filing a refund suit. That program requires Plaintiffs to enter into a closing agreement,⁴⁸ which would prohibit them from filing a refund suit. 26 U.S.C. § 7121(b); see also States S.S. Co. v. IRS, 683 F.2d 1282, 1284 (9th Cir. 1982) (citation omitted) (purpose of closing agreement is “once and for all to terminate and dispose of tax controversies”). Accordingly, Plaintiffs could not contest the validity of the Transition Rules in refund litigation. Plaintiffs thus lack an adequate remedy at law, and the AIA does not prohibit this suit.⁴⁹

In short, the IRS has attempted to make the Transition Rules a closed loop. Complying with those rules leads to a closing agreement, which precludes a refund suit to challenge the rules. And refund litigation, which focuses solely on whether there was an overpayment of tax required by the Internal Revenue Code, does not provide an avenue to challenge the validity of the Transition Rules. Either way, Plaintiffs cannot challenge the Transition Rules by any means other than this suit. Accordingly, because there is no other adequate remedy at law, the AIA does not prohibit this action.

CONCLUSION

The AIA does not bar Plaintiffs’ lawsuit, which seeks to remove the impediment of the Transition Rules and to allow Plaintiffs to apply to directly enter the Streamlined Procedures on the same footing as every other applicant to that program. Once in the Streamlined Procedures, the IRS can audit, assess, and collect any tax — or any item that the AIA treats as a tax — under the law. Nothing about the remedies Plaintiffs seek stops the IRS from doing so. Accordingly, this Court should reverse the district court’s order and remand the suit for consideration of the merits.

Respectfully submitted,

George M. Clarke III
Joseph B. Judkins
Baker & McKenzie LLP
815 Connecticut Avenue, NW
Washington, D.C., 20006
(202) 835-6184
Counsel for Plaintiffs-Appellants

APRIL 2017