In Hancock County Land Acquisitions v US the taxpayer brought an action alleging that the IRS’s failure to refer its case to the IRS’s Independent Office of Appeals violated the Taxpayer First Act’s addition of Section 7803(e)(4) and its mandate that Appeals “shall be generally available to all taxpayers.” The Eleventh Circuit, in an unpublished opinion, held that the Anti-Injunction Act (AIA) barred the lawsuit.
The facts in Hancock involve an IRS examination that eventually led to the IRS’s issuance of a Final Partnership Administrative Adjustment (FPAA) pertaining to a charitable contribution deduction of approximately $180 million for a conservation easement Hancock had donated on land it owned. IRS had asked Hancock to extend the SOL on assessment prior to issuing the FPAA. Hancock refused but then changed its mind; at that point the IRS had moved on and issued the FPAA.
Hancock filed a suit in federal court asking for injunctive relief:
(1) compelling the IRS to agree to extend the statute of limitations,
(2) compelling the IRS to provide Hancock with “independent review” of its tax case by the Appeals Office,
(3) enjoining the IRS from violating I.R.C. § 7803(e), and
(4) temporarily enjoining the IRS “from issuing an FPAA” until after providing Hancock with “an independent review of its case by the Appeals Office.”
The district court dismissed the case, finding that the suit was barred by the AIA and its close cousin, the tax exception to the Declaratory Judgment Act (DJA). I discussed some of the preliminary filings in the district court case, as well as a Tax Notes article by Kristen Parillo in More On The Implications of CIC Services last May.
Earlier this month the 11th Circuit affirmed the district court, applying CIC Services. The 11th Circuit described the Supreme Court’s holding as follows:
Three considerations led to that conclusion in CIC Services. First, the reporting rule at issue “impose[d] affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty,” second, the taxpayer was “nowhere near the cusp of tax liability” because the “reporting rule and the statutory tax penalty [were] several steps removed from each other,” and third, the requirement was enforced through criminal penalties in addition to tax penalties.
These considerations did not favor Hancock County:
First, Hancock will not be subject to any “costs separate and apart” from the tax penalty that may result from the FPAA.
Second, Hancock was on “the cusp of tax liability” when it filed its suit, because the FPAA is the statutory prerequisite to assessing a tax on Hancock, see I.R.C. § 6232(b), and Hancock concedes that “if the FPAA is allowed [to] stand, the IRS will be able to immediately assess a tax.”
Third, Hancock will suffer no criminal punishment by following the AIA’s “familiar pay-now-sue-later procedure.” [LB: in fact, Tax Court allows the pay later approach]
As the Eleventh Circuit framed the challenge, Hancock’s suit was, “[a]t its heart…a ‘dispute over taxes’”(quoting CIC Services):
Unlike in CIC Services, the “legal rule at issue” here, is a tax provision, not a reporting requirement backed up with a tax provision. Hancock’s single claim alleged that the IRS violated § 7803(e)(4) by failing to provide Hancock with administrative review of its tax case. To remedy that alleged violation, Hancock sought to compel the IRS to provide it with administrative review and, until it did, to prevent the IRS from issuing an FPAA (which the IRS had already issued). The FPAA that the IRS had issued finds that Hancock improperly claimed a $180 million deduction on its 2016 tax return, resulting in an underpayment of taxes. Because the relief Hancock’s lawsuit seeks would restrain the IRS from assessing and collecting those taxes, it is barred by the AIA.
The 11th Circuit also easily dismissed the taxpayer’s alternate argument that even if the AIA applied, the taxpayer should be entitled to benefit from the narrow Enoch v Williams Packing exception if they will “suffer irreparable injury if collection [of the tax] were effected” and show that “it is clear that under no circumstances could the [IRS] ultimately prevail.” As to the first prong, the taxpayer could seek substantive redress in Tax Court (albeit without the confidentiality that comes with a possible administrative resolution). As to the second prong, the opinion noted that it was not clear that the statute required Appeals access at the time the taxpayer sought it, noting that 7803(e)(5) provides for referral to the Appeals Office for “any taxpayer which is in receipt of a notice of deficiency” and that could also be read to mean the analogous FPAA.
CIC Services arose in the context of a pre-enforcement taxpayer challenge to IRS rulemaking. But many aggrieved taxpayers will attempt to get around the AIA in the context of direct IRS inquiries to the positions taken on tax returns. In administrative law parlance, these latter challenges pertain to the IRS’s adjudicatory powers.
Following on the heels of last week’s First Circuit opinion in Harper v Rettig that held that the AIA did not bar a constitutional challenge to the IRS’s use of John Doe summons, we are seeing courts struggle to apply the Supreme Court’s CIC Services opinion.
I am having a hard time squaring this case and Harper v Rettig. The same considerations the 11th Circuit discusses in Hancock County Land Acquisitions would prevent a challenge to the IRS’s John Doe summons process. The logical conclusion of the First Circuit’s approach in Harper v Rettig is a much more permissive use of courts to challenge all sorts of IRS actions in the course of the IRS’s attempt to gather information, not just those that arise in connection with the issuance of a John Doe summons.
On the other hand, one byproduct of Hancock is that it essentially renders meaningless the TFA mandate that taxpayers have access to Appeals, thus frustrating a fundamental taxpayer right. While it is difficult to envision a partisan Congress taking this on, perhaps it is time for Congress to take a fresh look at the AIA and the important issue of when and in what circumstances taxpayers can challenge IRS actions. A perhaps less steep hill to climb would involve Congress narrowly providing a specific exception to the AIA for supposed violations of the right to Appeals in Section 7803(e)(4). In the meantime, I suspect that we will soon have another opportunity for other circuits and perhaps the Supreme Court wrestling with the meaning of a 19th century statute that continues to present challenges.