In this brief post and following on Professor Bryan Camp’s discussion, I offer some initial observations on the Supreme Court’s CIC Services opinion. As Keith noted in his introduction to Bryan’s post, I am not disinterested in this issue-with the Harvard Clinic and on behalf of the Center for Taxpayer Rights I helped write an amicus brief seeking cert and another in support of the plaintiffs at the Supreme Court.
I also come at the issue not as someone who reflexively believes that IRS action is improper, or that IRS systemically runs roughshod over the APA. I do think, however, that tax administration would benefit from a defined and prompt path for litigants to challenge IRS rulemaking apart from traditional enforcement proceedings. Pre-enforcement challenges to agency rulemaking are the norm outside tax law. The CIC Services decision does not change the norm in tax administration, with the exception of some (or maybe all) challenges relating to information reporting rules. (Justice Kavanaugh’s concurrence offers a broader take on the opinion as he believes the opinion’s focus on the object of the suit rather than the downstream effect as the Court previously held in Americans United and Bob Jones blesses pre-enforcement suits challenging a regulation backed by a tax penalty; I will need to think further on this).
Why do I hedge though about challenges to information reporting? The opinion seems to offer wide berth to challenges to all information reporting regimes. To that end, see page 6 of the slip opinion, where the majority states that a “reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection.”
Later though it does leave the door ajar to distinctions when at page 9 it sets out a three part test to evaluate whether the action is a “tax action in disguise.” The three-part test is that 1) the regime imposes affirmative costs other than the underlying tax, 2) there are several steps between the reporting and any penalty that the IRS would impose on a party failing to report and 3) there are potential criminal penalties for noncompliance. For now I will focus on part two, that the reporting rule “and the statutory tax penalty are several steps removed from each other. “
The opinion notes that for CIC Services before any penalty could arise a number of steps must occur, including that CIC fails to provide the required information about the micro captive transactions, the IRS must determine that there has been a violation of the Notice, and then IRS must exercise its discretion to impose the penalty. One question that lower courts will likely explore is whether the steps between not complying and possible penalty imposition are similar enough in other information reporting regimes to lead to a conclusion that a challenge to a different information reporting is to the reporting rather than a tax penalty. That the CIC opinion did not explicitly address how its approach would affect for example the interest reporting regime that bankers challenged in the Florida Bankers case suggests perhaps some wiggle room, though on balance I think a better reading of the majority opinion is that there is little basis to offer a distinction with a difference. In my view, under the CIC approach, Florida Bankers comes out differently.
Similarly while Justice Sotomayor in her concurrence suggests perhaps a different outcome if the challenge related to a taxpayer’s own reporting (a distinction not made in the opinion), I think most of the likely challenges that will come from third parties anyway. No doubt that as Congress considers new statutory reporting rules on banks as part of its efforts to clamp down on the tax gap, I suspect we may soon see some opportunity to see bankers and other financial institutions mount fresh challenges.
While Bryan and I differ in our takes on the case, like Bryan I also think a fitting outcome would be for Congress to take a fresh look at the AIA and perhaps allow parties the opportunity to challenge tax rules or regulations in preenforcement proceedings (to that end see my post Is It Time To Reconsider When IRS Guidance Is Subject to Court Review? ) That post discusses such a proposal by Professor Kristin Hickman and Gerald Kerska as well as a separate proposal from Stephanie Hunter McMahon.