Wishing our readers a belated Happy Father’s Day. Midway through drafting this, I enjoyed Father’s Day breakfast in bed from my 13-year old daughter Hannah and my three step-daughters. Hannah filled a mason jar with coupons reflecting things she would like to do this year with me or things she is looking forward to that we have already planned (e.g., Broadway play, trip to Maine to drop off at camp).
On to a tax procedure update….
Earlier this month on PT I discussed the oral argument at the DC Circuit in the Z Street v Koskinen case in a post DC Circuit Criticizes Government in Case Alleging an Israel Special Policy for Tax Exemptions. The case involves allegations that the IRS subjected an organization seeking 501(c)(3) status to special scrutiny. Z Street argued that the IRS scrutiny violated the First Amendment because IRS had an internal review policy that subjected Israel-related organizations “to more rigorous review procedures than other organizations applying for that same status.” The District Court had earlier ruled that in favor of Z Street on the government’s motion to dismiss, and the government appealed the denial. The oral argument in May reflected the panel’s deep displeasure with the government’s attempt to use the Anti-Injunction Act to avoid (or delay more precisely) judicial review of serious allegations. After listening to the argument, I was certain that the panel would find a way to allow the case to proceed to the merits.
On Friday, the DC Circuit decided the case in favor of Z Street (opinion here).
Our frequent guest poster Pat Smith has a succinct write up on the opinion over at Tax Prof. I offer some brief observations on the opinion.
The opinion does a nice job summarizing the main AIA cases (such as Bob Jones, Cohen and Americans United) and what they signify:
These cases, then, stand for the following basic propositions. First, outside of certain statutorily authorized actions, like those brought pursuant to section 7428, the Anti- Injunction Act bars suits to litigate an organization’s tax status (Bob Jones and “Americans United”). Second, the Act does not apply in situations where the plaintiff has no alternative means to challenge the IRS’s action (South Carolina) or where the claim has no “implication[s]” for tax assessment or collection (Cohen). Finally, in administering the tax code, the IRS may not discriminate on the basis of viewpoint (Regan).
Some had thought that the DC Circuit in Z Street would decide the case in favor of Z Street on the basis of the suit not having an impact on assessment or collection, especially in light of recent cases which have suggested a narrow reading of those terms (like Cohen and Direct Marketing). Pat Smith’s post on Procedurally Taxing and his recent Tax Notes article discuss the recent cases and in particular the likely impact Direct Marketing will have on AIA cases.
In his Tax Prof Op-Ed, Pat offers an observation that the Florida Bankers challenge to expanded information reporting regs (which I have discussed previously here) may give the DC Circuit an occasion to discuss where to draw lines around what is an impermissible connection to assessment or collection.
On the issue as to when a suit is impermissibly connected to assessment or collection, I point readers to the main language in the Z Street case where the panel decided that the case was not controlled by Cohen, but rather fit within the “no other remedy” South Carolina exception:
Recall that Cohen requires that we examine Z Street’s complaint to determine, among other things, “any implication the remedy [it seeks] may have on assessment and collection.” In Cohen, the remedy sought could have no possible “implication” for assessment and collection because the IRS had already assessed and collected the tax—it was in the Treasury.By contrast, Z Street’s suit arguably could have “implication[s]” for assessment and collection. If, for example, Z Street prevails in this case and obtains a tax exemption earlier than it otherwise would have, contributions to it will be tax deductible earlier, thus reducing the overall assessment and collection of taxes. In the end, however, we have no need to decide whether such an implication is sufficient to trigger the Anti-Injunction Act. As the Court explained in South Carolina, the Act does not apply at all where the plaintiff has no other remedy for its alleged injury—precisely the situation in which Z Street finds itself. (emphasis added; citations omitted).
To illustrate its point that Section 7428 was inadequate, the panel continued:
Consider section 7428. According to the Commissioner, if Z Street had just waited an additional 32 days it could have filed suit under this provision and obtained an “adequate remedy.” Appellant’s Br. 48. But as the Commissioner concedes, section 7428 authorizes a court to issue only “a declaration with respect to [an organization’s] qualification” for a section 501(c)(3) exemption, 26 U.S.C. § 7428, and Z Street is not seeking to establish its eligibility for a tax exemption, supra at 10. Instead, it seeks an order prohibiting the IRS from delaying consideration of Z Street’s section 501(c)(3) application because of the organization’s views on Israel. The “only thing we’re suing about,” Z Street’s counsel told us at oral argument, “is delay.” Oral Arg. Rec. 51:14–38; see also id. at 41:57–42:57 (statement of Z Street’s counsel agreeing that all Z Street seeks is an order barring application of the “Israel Special Policy” insofar as it causes delay). In other words, although section 7428 provides a remedy, that remedy cannot address Z Street’s alleged injury.
Just this past Thursday I submitted a revised Chapter 1 of Saltzman and Book IRS Practice & Procedure, which includes an expanded discussion of the AIA (and APA). What was current as of Thursday became in need of a refresh on Friday (Thomson Reuters: hold the presses). Such is the state of law under the AIA. Stay tuned as the DC Circuit in Florida Bankers will likely have more to say on the topic, and in particular when implications on assessment or collection are sufficient to trigger AIA preclusion.