Last week, in Florida Bankers Association v US (Florida Bankers) the district court in DC ruled on an Administrative Procedure Act (APA) challenge to Treasury‘s 2012 regulations requiring US banks to report interest to nonresident aliens. The regulations are part of IRS’s expanded efforts to track down offshore evasion, and are slated to take effect later this year. Florida Bankers was a major victory for the government, as the court upheld the validity of the regulations.
I write to highlight the procedural issues in the case, and to connect the case with issues I wrote about in a post last week on the Halbig v Sebelius case that addressed a challenge to part of the Affordable Care Act. Jack Townsend (as usual) has been all over the Florida Bankers case, with a post from last fall highlighting the suit and another post from the weekend mentioning some of the procedural challenges that the plaintiffs faced to get the court to consider the suit, including the Anti-Injunction Act. What is most interesting to me about Florida Bankers is that the court allowed the plaintiffs to get the court to consider the merits at all. There is a Maginot Line of defenses that the government can generally invoke when plaintiffs challenge the validity of guidance prior to a deficiency case or refund suit. The government can invoke defenses such as standing, ripeness, the Anti-Injunction Act, the Declaratory Judgment Act and the APA itself to sidestep those challenges until a later day.
Generally, parties unhappy with regulations or other Treasury guidance have had to wait until a deficiency case or refund suit to challenge the guidance. A plaintiff challenge can include substantive challenges (e.g., the reg is inconsistent with the statute) or procedural challenges (e.g., Treasury has failed to adequately explain the rationale for issuing the guidance). Occasionally, courts allow parties to challenge guidance in suits under the APA, outside the deficiency or refund procedures, as in the Cohen case from a few years ago, where parties challenged the adequacy of the IRS’s procedures to refund telephone excise tax payments.
The Florida Bankers’ plaintiffs sought a preenforcement court ruling using the APA and the Regulatory Flexibility Act (RFA) as a mechanism to get the court to strike down the regulations. Its APA claim was that the regulations violated the APA because they were arbitrary and capricious—a standard under APA 706. That standard provides a limited avenue for invalidating guidance and requires that the agency show that it examined the relevant data and arguments prior to adoption, and adequately explain its reasoning for the rules. The RFA imposes a separate set of rules and requires agencies to analyze the impact of rules on small entities and certify that the rules will not have a significant economic impact on those entities.
As I wrote in my earlier post on Halbig v Sebelius the DC district court there likewise considered a preenforcement (i.e., challenge outside normal deficiency or refund procedures) challenge to regulations under the Affordable Care Act. Halbig, unlike Florida Bankers, in addressing the defenses that the government can invoke against a party challenging Treasury guidance considered the applicability of APA sec 704. APA 704 permits judicial review of any “[a]gency action made reviewable by statute,” as well as any “final agency action for which there is no other adequate remedy in a court.” In Halbig, the court also allowed the preenforcement challenge, having found under APA 704 that the refund procedure was an inadequate remedy. As my earlier post describes despite allowing the challenge the court upheld the regulations extending tax credits to insurance purchased from federally-facilitated exchanges in addition to state-run health exchanges.
Although Florida Bankers came into court pursuant to the APA (recall it was essentially an APA 706 challenge) and the plaintiffs sought the somewhat unusual path to court review, the court’s opinion did not mention APA 704 in considering the validity of the regulations, and focused instead on other important issues, such as standing, the Anti Injunction Act (AIA) and Declaratory Judgment Act (DJA). As Jack Townsend’s post highlighted, Florida Bankers offers some interesting lessons on the AIA and some questions about the APA which I will briefly elaborate on in this post.
Florida Bankers: APA and AIA Considerations
Given APA 704’s requirement that there be a finding that other remedies are inadequate, I expected in Florida Bankers to see some discussion of the adequacy of normal tax procedures. Nonetheless, Florida Bankers did discuss the role that the AIA and DJA play in limiting preenforcement challenges. In this post, I will briefly discuss those provisions and the way the Florida Bankers court was able to sidestep the AIA’s general bar to challenging the adequacy of guidance in any form other than refund or deficiency procedures.
Before getting to Florida Bankers, a quick comparison to Halbig is perhaps helpful. Halbig extensively discusses the AIA and DJA’s applicability. Halbig considered challenges to the ACA regulations. Both employers and individuals brought the suit. The Supreme Court held in the main ACA case from last year (National Federation of Independent Business v. Sebelius) that penalties to individuals under Code Section 5000A are not a tax for purposes of the AIA. Despite some heavy opposition from tax procedural purists (see a nice summary of the views on the AIA and the ACA in an essay by Professors Bryan Camp and Jordan Barry) Supreme Court was thus able to avoid an AIA bar to preenforcement consideration of the ACA’s constitutionality by virtue of this determination. Interestingly, the Halbig court found that the employer penalty under Section 4980H was a tax for purposes of the AIA, contrary to the Fourth Circuit’s view in Liberty University v Lew, which had held that the AIA did not prohibit a preenforcement challenge brought by employers. As such, Halbig found that the AIA barred claims brought by employers, and dismissed the employer/plaintiffs from the case. Halbig was able to reach the merits, however, because the case also had individual plaintiffs. Given National Federation of Independent Business v. Sebelius and the Supreme Court’s holding that the individual penalties are not a tax for purposes of the AIA, the presence of an individual plaintiff in addition to an employer was crucial in bypassing the AIA.
Florida Bankers had no Supreme Court decision that definitively stated that the penalties that the taxpayers would be subject to for violating the information reporting regs was not a tax. Yet, it did have analogous DC Circuit Court of Appeals authority that it felt controlled the issue. In considering the applicability of the AIA in Florida Bankers, it is helpful to focus on the statutes in question.
The AIA, (codified at Internal Revenue Code at Section 7421(a)) states: “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. Found in Title 28, the DJA authorizes declaratory relief except “with respect to Federal taxes.” Generally speaking, the DJA’s sweep is the same as that of the AIA, although it bars declaratory rather than injunctive relief. As Florida Bankers describes, “[t]he manifest purpose of [the AIA] is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund.” “The AIA has ‘almost literal effect’: It prohibits only those suits seeking to restrain the assessment or collection of taxes.” (citations omitted)
The government in Florida Bankers argued that the DJA and AIA should have barred the court’s consideration of the case until someone failed to comply with the information reporting requirements and was assessed a penalty and brought a refund action (penalties for failure to comply with the reporting regulations are not subject to deficiency procedures). That is the government looked to the DJA and AIA as part of its ability to push off a challenge to agency guidance until a later day.
The court’s discussion of the issue is interesting. First, the court noted the surface problem with the government’s argument:
At first glance, the Government’s argument that the AIA and DJA apply seems misguided. The Bankers Associations are, after all, only challenging a reporting requirement – not the “assessment or collection of any tax.” In this case, the imposition of a federal tax does not necessarily follow from the promulgation of the reporting requirements, and no tax has yet been incurred. A tax would be imposed here only if one of Plaintiffs’ members refused to comply with the reporting requirements – and none has threatened to do so.
The government pointed out in response however that failure to comply with the reporting requirements could trigger a $100 penalty under Section 6721, which the Code treats as a tax. The court noted that “in theory, gutting the regulations could restrain the assessment and collection of these yet-unaccrued penalties.”
In determining that the AIA and DJA did not apply to prevent consideration of the regulations’ validity, the district court cited to Foodservice and Lodging Institute, Inc. v. Regan, a DC Circuit case from the late 80’s that considered and allowed a pre-enforcement challenge to a regulation that required restaurants to report tips despite the government’s claim that the AIA barred consideration:
The D.C. Circuit has confirmed that reporting requirements related to Chapter 61A of the Internal Revenue Code – as opposed to the associated penalties found in Chapter 68B – are not subject to the AIA or DJA. In Foodservice and Lodging Institute, Inc. v. Regan, 809 F.2d 842 (D.C. Cir. 1987), the plaintiffs challenged an IRS regulation that required restaurants to report the amount of tips collected in a given year. The Court observed that, “[o]n its face, the regulation does not relate to the assessment or collection of taxes, but to IRS efforts to determine the extent of . . . compliance” with other tax provisions. Id. at 846. Even though this reporting requirement would similarly be subject to Chapter 68B penalties for non-compliance, the Court held that the AIA did not apply. See 26 U.S.C. 6053(c)(1) (tip-reporting requirement); id. § 6721(a) (penalty). This Court can hardly hold to the contrary (emphasis added).
In Foodservice and Lodging Institute, the DC Circuit concluded that the AIA did bar consideration of other regulations that went beyond information reporting. For the DC Circuit, what was crucial was the distinction between regulations that focus on reporting and other rules that are more directly connect to the determination of a taxpayer or third party’s liability.
I note that as in Florida Bankers, the DC Circuit in Foodservice Lodging ultimately agreed with government on the merits. That is, in both cases the court upheld the validity of the regulations. Yet, Foodservice Lodging, and now Florida Bankers and Halbig, reveal ways for creative litigants to challenge regulations prior to a refund or deficiency case. Regulations that address a third party’s information reporting obligations and are directed at other party’s tax compliance seem fair game for a challenge outside the normal tax procedure channels.
Parting Thoughts
The courts, practitioners and scholars are struggling to get up to speed on the intersection between administrative law and tax procedure. For example, I am not sure why the Florida Bankers case barely mentions whether the refund procedures are adequate for purposes of APA 704, while the Halbig case wrestled with that issue. I will continue to explore these issues in this blog and in the Saltzman/Book treatise, as we are bound to see more cases challenging Treasury’s guidance. I am currently working on the rewrite to Chapter 3 to the Saltzman Book IRS Practice and Procedure treatise to better integrate into the book these important developments. In the meantime, for those wanting some more discussion of these fascinating issues, while not a complete list, articles that I link here by Kristin Hickman, Ellen Aprill and Patrick Smith are good places to start.