Readers of Procedurally Taxing are familiar with the Anti-Injunction Act (AIA) and the CIC Services case that is pending in the Supreme Court. CIC Services raises whether the AIA bars a challenge brought under the Administrative Procedure Act in a pre-enforcement proceeding. It involves the hefty penalties under Section 6707A for failing to comply with information reporting obligations. Last week, in Govig and Associates v US a federal district court in Arizona considered a similar issue. In Govig, the taxpayers claimed that an IRS notice identifying listed transactions violated the APA because it was issued without going through the notice and comment process. In Govig the court concluded that the AIA precluded a pre-enforcement challenge to the IRS notice that triggered the immediately assessable penalty under Section 6707A.
At issue in Govig is Notice 2007-83. That notice informed taxpayers that tax benefits claimed for a category of trust arrangements were not allowable for federal tax purposes and designated as “listed transactions” trust arrangements that had been “promoted to small businesses and other closely held businesses as a way to provide cash and other property” to owners “on a tax-favored basis.” As the opinion notes, the Notice targeted transactions where businesses used trusts to create welfare benefit funds that included cash-value life insurance policies.
The taxpayers in Govig are participants in trusts that have been designated as “listed transactions” under the Notice. The plaintiffs in the case paid the penalties that were assessed in 2019 for violations relating to the 2015 year. They then filed a complaint in federal court, alleging that the IRS failed to comply with the notice and comment regime generally required for legislative rules under the APA and asking the court to set aside the notice as arbitrary and capricious.
In granting the government’s motion to dismiss for lack of jurisdiction, the district court explicitly embraced the reasoning of the DC Circuit in the Florida Bankers case. (For prior posts on Florida Bankers, see my discussion here and Patrick’s Smith’s two part post here and here). As the opinion notes, the challenge was framed as one directed to the “information gathering mandated by the Notice’s disclosure requirement and has nothing to do with the assessment or collection of a tax.” The court reasoned that this is a “distinction without difference” and agreed with the conclusion reached by then-Judge Kavanaugh in Florida Bankers, that the AIA applies “even if the plaintiff claims to be targeting the regulatory aspect of the regulatory tax . . . because invalidating the regulation would directly prevent collection of the tax.” 799 F.3d at 1070-71.
It also distinguished the Direct Marketing opinion, emphasizing differences in the text between the Tax Injunction Act (TIA) and the AIA at issue in Govig (and CIC Services):
The pertinent part of the TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” 28 U.S.C. § 1341 (emphasis added). The AIA in contrast states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” 26 U.S.C. § 7421 (emphasis added).
In reasoning that Direct Marketing should not be read to support pre-enforcement challenges to federal information reporting requirements backstopped by Title 26 penalties the Govig court leaned in on the differences in wording between the TIA and AIA, noting that those differences mattered in the majority Direct Marketing opinion:
There the Court, applying the cannon against surplusages as well as Noscitur a sociis, found that: the words “enjoin” and “suspend” are terms of art . . . referring to different equitable remedies that restrict or stop official action to varying degrees, strongly suggesting that “restrain” does the same. As used in the TIA . . . “restrain” acts on a carefully selected list of technical terms — “assessment, levy, collection” — not on an all-encompassing term, like “taxation.” To give “restrain” the broad meaning selected by the Court of Appeals would be to defeat the precision of that list, as virtually any court action related to any phase of taxation might be said to “hold back” “collection.” Such a broad construction would thus render “assessment [and] levy” — not to mention “enjoin [and] suspend” — mere surplusage, a result we try to avoid.
In Govig, these differences led the district court to conclude that while the TIA and AIA are similar the differences were enough to justify the AIA’s barring of the pre-enforcement challenge:
The AIA is not so limited by “technical” or “precise” language. Instead, it contains a broader restriction on any suit “for the purpose of” restraining the assessment or collection of taxes. 26 U.S.C. § 7421. The Court can only conclude this different wording is intended to carry a different broader meaning; a conclusion supported by the Supreme Court’s prior applications of the AIA
Finally, the district court in Govig held that the case did not implicate exceptions to the AIA, including the South Carolina v. Regan exception when there is no alternative for posing a legal challenge and the Williams Packingexception when “(1) it is ‘clear that under no circumstances could the government ultimately prevail’ and (2) ‘equity jurisdiction’ otherwise exists, i.e., the taxpayer shows that he would otherwise suffer irreparable injury.”Church of Scientology v. United States, 920 F.2d 1481, 1485 (1990) (citing Commissioner v. Shapiro, 424 U.S. 614, 627 (1976) (quoting Williams Packing, 370 U.S. at 7)).
Conclusion
The Govig case itself breaks no new ground. While it recognizes that the challenge in Govig is to a reporting regime, rather than the underlying tax, its approach in rejecting the challenge closely follows the reasoning in Florida Bankers. In the next few months we will see whether this approach is the law of the land, as CIC Services tees this issue up directly.
What is not clear to me from reading the opinion (admittedly I did not dig deeper into the pleadings or underlying briefs) is why the taxpayers did not bring their APA challenge in a refund proceeding. The opinion notes that the plaintiffs fully paid the assessed penalties imposed under Section 6707A. In a refund proceeding, the plaintiffs could have raised the same allegations, i.e., that the alleged IRS notice was issued contrary to the APA. In addition, while the plaintiffs asked the court to take judicial notice that violations of the reporting requirements could lead to criminal penalties, the court declined, noting that Section 6707A merely preserves the possibility for other penalties. The issue of potential criminal liability for violating these notices is also raised in CIC Services, where the plaintiff has alleged that the possibility of criminal liability itself makes the traditional refund process inadequate as a forum for raising alleged violations of the APA.