Readers are likely familiar with CIC v IRS, which we originally discussed back in 2017 when a federal district court in Tennessee dismissed a suit that a manager of captive insurance companies and its tax advisor had brought that sought to invalidate IRS disclosure obligations on advisors and participants in certain micro captive insurance arrangements. Having made its way through a Sixth Circuit opinion affirming the district court and a colorful and divided denial of a request for an en banc hearing, the Supreme Court granted cert earlier this spring.
This week the Center for Taxpayer Rights, under the leadership of Nina Olson, filed an amicus brief in support of CIC, with Keith, Carl Smith, and Meagan Horn of Thompson & Knight LLC, on behalf of the Harvard Tax Clinic, and I, all as counsel for the Center.
The issue in the case involves whether the Anti Injunction Act (AIA) shields the IRS’s information gathering requirements issued in IRS Notice 2016-66 from APA scrutiny outside traditional tax enforcement proceedings. The Sixth Circuit reasoned that the presence of a potential penalty for failing to comply with the Notice that would be assessed in the same manner as taxes shielded the IRS from pre-payment APA review.
The case provides an opportunity to explore the reach of the AIA in light of a number of recent developments, including the 2015 Supreme Court opinion in Direct Marketing Association v Brohl and recent scholarship from Professor Kristin Hickman and Gerald Kerska calling into question whether the AIA should bar pre-enforcement challenges.
Our brief requests that the Supreme Court reverse the decision of the Sixth Circuit because in our view it improperly restricts taxpayers from challenging certain IRS requests for information in situations where the taxpayer is not bringing suit to contest the underlying merits of the tax liability.
In our brief, consistent with the mission of the Center for Taxpayer Rights, which is dedicated to furthering taxpayers’ awareness of and access to taxpayer rights, we highlight the potential negative effect that the Sixth Circuit’s approach may have for a wide spectrum of taxpayers, including low income taxpayers. To bring that point home we explore past IRS practices requiring information from refundable credit claimants and the possible harm that future information reporting efforts could have on participation and the welfare of low income taxpayers .
As we discuss in the brief, we believe that the Sixth Circuit’s holding is inconsistent with the Court’s holding in Direct Marketing Ass’n v. Brohl:
[Direct Marketing] demonstrates that the AIA’s reach is limited with respect to challenges to requests for information by taxing authorities. The Internal Revenue Service cannot avoid this limitation by threatening taxpayers with a penalty if they do not comply with the rule-making (even if such penalty is “assessed and collected in the same manner as taxes” under the Code). If the Sixth Circuit’s overly broad interpretation stands, low-income taxpayers will be subjected to potentially severe adverse effects. The IRS will hold the unilateral right to shield their rule-making from APA scrutiny by choosing to include the right to impose a potential penalty for noncompliance. The low-income taxpayer will be at the mercy of the IRS in these circumstances with no practical ability to contest the rule-making authority of the IRS without first violating the rule established by the IRS and then paying the full amount of the penalty imposed.
The case is teed up for the fall term, and there will likely be many amicus briefs filed in the coming days.
Update: late yesterday CIC filed its opening brief, emphasizing that challenges to tax reporting requirements that are backstopped by penalties should not implicate the AIA. The brief explores the implications of Direct Marketing, questions whether the presence of an assessable penalty should meaningfully distinguish the case from Direct Marketing, argues that the Sixth Circuit’s holding furthers neither the interest of the APA or the AIA, and considers the practical consequences of an approach that prevents challenges until after a potentially sizable penalty is assessed.
For readers interested in a nuance, I note that CIC’s brief raises an issue that lurks below the main issue, namely whether the AIA is a jurisdictional statute or merely a claim processing rule (see page 23). That issue is teed up because CIC argues that the principle that jurisdictional rules should be clear merits a finding that it should be able to bring the challenge. The brief does not, however, concede on the issue that the AIA is jurisdictional , and in so doing refers to a concurring opinion by now Justice Gorsuch in the 2013 Tenth Circuit Hobby Lobby opinion. I explore the issue of whether the AIA is jurisdictional in the upcoming update to Chapter 1.6 in Saltzman Book IRS Practice and Procedure. The issue of whether the AIA is jurisdictional may be more important if the Supreme Court affirms the Sixth Circuit.