In a unanimous decision, the Supreme Court held that a lawsuit challenging the validity of Notice 2016-66, which requires taxpayers engaging in certain microcaptive insurance transactions and their material advisers to report information about the transactions to the IRS, is not barred by the Anti-Injunction Act (Sec. 7421(a)) and therefore may go forward.
Facts: CIC Services, which manages captive insurance companies, sought an injunction in district court against Notice 2016-66, claiming it was invalid under the Administrative Procedure Act (APA). The IRS, arguing that CIC's action was barred by the Anti-Injunction Act, moved to dismiss. The district court agreed with the IRS and granted the motion (CIC Services, LLC, No. 3:17-cv-110 (E.D. Tenn. 11/2/17)). CIC Services appealed to the Sixth Circuit, which affirmed the district court (CIC Services, LLC, 925 F.3d 247 (6th Cir. 2019)).
Issues: In November 2016, the IRS issued Notice 2016-66, which identifies certain microcaptive insurance transactions as reportable transactions and requires taxpayers and their material advisers engaging in these transactions to provide specified information to the IRS describing them or face civil monetary penalties under Sec. 6707A or criminal penalties of fines and up to one year in prison under Sec. 7203. For all purposes of the Code, including the Anti-Injunction Act, the civil penalties are deemed to be taxes, but the criminal penalties are not deemed to be taxes. (CIC Services is not known to have violated the notice, the Court stated.)
CIC Services claimed Notice 2016-66's promulgation violated the APA, in that it was arbitrary and capricious by imposing new reporting requirements without demonstrated need and by the IRS's not following prescribed procedures of notice and consent.
The IRS argued that CIC's suit was barred by the Anti-Injunction Act, which generally forbids lawsuits restraining the assessment or collection of any tax. Instead, plaintiffs (other than by petition for review by the Tax Court and in response to certain IRS procedural violations) are generally required to first pay any contested tax and then sue for its refund.
The IRS also contended that CIC's purpose in suing was to eliminate its reporting requirement under the notice and that there was no real difference between attempting to invalidate the notice and attempting to preclude its penalty. Thus, it argued, an injunction against the notice and against the penalty are just "two sides of the same coin."
Holding: The Supreme Court held that CIC's action was not barred by the Anti-Injunction Act, even though a violation of the notice may result in a tax penalty. The Court, distinguishing between a suit seeking to restrain collection or assessment of a tax and one seeking to invalidate a notice, concluded that the facts showed that CIC's suit targeted Notice 2016-66 and not the downstream tax penalty.
"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. That is so even if the reporting rule will help the IRS bring in future tax revenue," the Court said (slip op. at 6). Under the Anti-Injunction Act, a suit's purpose depends on the relief the suit requests. CIC's complaint sought to invalidate Notice 2016-66 itself, not the tax penalty that might follow a violation of the notice's reporting requirements. Thus, the Anti-Injunction Act did not bar the suit.
As for the IRS's contention of no real difference between a suit to invalidate the notice and one to preclude the tax penalty, the Court found that three aspects of the regulatory scheme belied this argument. First, Notice 2016-66 imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty.
Second, CIC's suit could not be characterized as a suit to enjoin a tax when CIC was "nowhere near the cusp of tax liability" (slip op. at 11) because, to owe any tax, CIC would have to first violate the notice, the IRS would then have to find noncompliance, and finally the IRS would have to exercise its discretion to levy a tax penalty.
Third, the existence of criminal penalties forced CIC to bring an action in the form it did, with a request for relief framed in the manner it was, because violating the notice and bringing a refund suit to recover any penalty imposed by the IRS would risk criminal punishment. The possibility of criminal punishment, according to the court "is not the kind of thing an ordinary person risks, even to contest the most burdensome regulation" (slip op. at 12).
The Court further found that allowing CIC's suit to proceed would not "enfeeble" the Anti-Injunction Act, thereby opening "the floodgates to pre-enforcement tax litigation," as the IRS had argued (slip op. at 2). While the Anti-Injunction Act applies to revenue-raising and regulatory taxes, CIC's suit was instead challenging a reporting mandate separate from any tax.
- CIC Services, LLC, No. 19-930 (U.S. 5/17/21)
— By Paul Bonner, a JofA senior editor.
