Will the Supreme court allow Treasury to keep getting away with murder?
Updated: Feb 9
Will Treasury Finally Be Subject to Judicial Review?
Monte Silver is a U.S. tax attorney residing in Israel and a partner at Silver & Co. who has helped obtain regulatory relief for small and midsize businesses from provisions of the Tax Cuts and Jobs Act.
In this article, Silver argues that the Supreme Court should rule in favor of Treasury and against CIC and other taxpayers that seek to invalidate Treasury action on a pre-enforcement basis.
For tax geeks with an interest in administrative law, the oral argument before the Supreme Court in the case CIC Services is as good as it gets. Finally, the Supreme Court will address whether, or the extent to which, Treasury will continue to enjoy preferential treatment among federal agencies in having its tax rules and regulations largely shielded from basic norms of administrative law and judicial review.
Judicial deference to Treasury, arising from the government’s need for revenue, has for years allowed Treasury and the IRS to blatantly disregard those norms and other statutorily mandated processes. Despite that, this article argues that the Supreme Court should rule in favor of Treasury and against CIC and other taxpayers who seek to invalidate Treasury action on a pre-enforcement basis.
The rationale is simple: CIC and plaintiffs in the other cases that seek to invalidate Treasury actions (1) are very powerful companies or associations, or companies involved in questionable conduct; (2) are on the wrong side of an important public policy; and (3) seek to invalidate actions they dislike, in many cases after having intensely lobbied against the actions before Treasury’s adoption of them. Allowing such preemptive actions will result in powerful taxpayers and associations (1) filing endless lawsuits that seek to invalidate (and seek injunctions that stay) Treasury actions they do not like, and (2) seriously impeding Treasury’s ability to do its valid job.
The Issue Before the Court
The issue before the court is specific: Does the Anti-Injunction Act (AIA) prevent CIC-like pre-enforcement challenges that seek to invalidate a tax?
Conceptually, the facts of the case are not complex. Congress has delegated to Treasury the authority to identify and gather information about potential tax shelters. Under its regulations, Treasury may, even by informal notice, require taxpayers to maintain and submit records involving suspicious “reportable transactions.” Under the Internal Revenue Code, failure to maintain and submit the records subjects the taxpayer to multiple penalties, defined as taxes.
Treasury's analysis revealed that some types of insurance contracts between related companies may be used as tax shelters. To educate itself on these transactions, Treasury issued an informal rule (Notice 2016-66) that defined those contracts as reportable transactions under the code. That notice required companies to disclose specific information on the transactions going back 10 years. Failure to comply with the disclosure requirements resulted in significant civil penalties and potential criminal liability.
CIC, a business entity involved in those transactions, was directly affected by the notice. At that stage, CIC had a choice: (1) refuse to comply, pay the tax/penalty, and then seek to invalidate the rule in a refund action (post-enforcement action); or (2) immediately bring a preemptive action seeking to invalidate the notice and an injunction to stay its enforcement (pre-enforcement action). Plaintiff chose the latter.
A Tennessee district court dismissed the lawsuit for lack of jurisdiction based on the AIA. The AIA states that federal courts have no jurisdiction to hear cases brought “for the purpose of restraining the assessment or collection of any tax.” The Sixth Circuit affirmed, adopting the 2015 ruling of the D.C. Circuit in the Florida Bankers case. Writing for the majority in Florida Bankers, then-D.C. Circuit Judge Brett Kavanaugh stated that the court had no jurisdiction to hear a pre-enforcement case that sought to invalidate a Treasury action and would, by definition, render impossible (not only restrain) the collection of the tax. It is important to note that nothing in the AIA or the circuit decisions limited the CIC or Florida Bankers plaintiffs in challenging the Treasury action in post-enforcement proceedings such as an action for refund (an alternate forum).
To understand the complexity of the issue to be decided requires one to understand the policies behind the AIA, basic concepts of administrative law, and judicial precedent. The policy behind the AIA is simple and has been stated by the Supreme Court in numerous instances: Allow Treasury to collect taxes and implement or enforce important policies without judicial interference, except through permissible alternate forums. In CIC, the government argues that CIC’s action not only would restrain the assessment and collection of a tax, but seeks to invalidate the notice and thus render impossible assessment and collection.
CIC’s and the many amicus briefs filed in support of the taxpayer raise powerful counterarguments:
1. Pre-enforcement review is the backbone of administrative law. Under the Administrative Procedure Act (APA), people and entities can proactively challenge the legality of an agency's action in court; they do not have to violate the action first and then raise invalidity as a defense. Further, there’s one uniform body of administrative law. The Supreme Court has rejected the notion of tax exceptionalism from general administrative law. Accordingly, since Treasury is subject to norms of due process, reasonableness, and transparency, it must be subject to pre-enforcement review. This is especially so because Treasury regulates ever-expanding spheres of everyday life, including child care, charity, healthcare, and the environment.
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