Last month the Sixth Circuit declined to grant a petition for rehearing en banc in the case of CIC Services v IRS. The case, which I discussed following the original panel decision in In CIC Sixth Circuit Sides With IRS in Major Anti Injunction Act Case, involves the reach of the Anti Injunction Act (AIA). But the frank concurring opinions and the dissent accompanying the denial of the en banc petition reveal differing views on the role of the modern administrative state and how tax administration fits in with broader administrative law norms. At issue is when taxpayers or advisors can challenge tax rules: the AIA has pushed challenges to issues like IRS compliance with the Administrative Procedure Act (APA) rulemaking requirements (including whether the rule was issued under the APA’s notice and comment regime) to deficiency cases or refund proceedings.
CIC highlights some differences between the IRS and other federal agencies. First, tax practitioners and the IRS itself refer to regulations as guidance. IRS treats certain non-regulatory guidance published in its Internal Revenue Bulletin, including the Notice in the case at issue, as binding on the IRS (and for that matter taxpayers can rely on it). Other agencies distinguish between regulations and guidance, with those agencies treating regulations as binding but guidance as not. In addition, other agencies generally expect that they will face pre-enforcement judicial challenges to the regulations that they issue. In contrast, pre-enforcement challenges to tax regulations or other binding IRS guidance are unusual, in large part because the AIA prevents suits to restrain the assessment or collection of tax.
So, tax administration rests somewhat uneasily within the broader framework of administrative law. To recap, the AIA generally pushes challenges to IRS rulemaking to traditional tax controversy venues, that is in Tax Court in deficiency cases (if the tax or penalty is subject to deficiency procedures) or federal courts in refund matters after having to fully pay and comply with the Flora full payment rule. Many other agencies gear up for challenges immediately after they promulgate binding rules rather than having to wait for enforcement proceedings.
All of this comes into sharp focus in CIC. The IRS issued informal guidance (a Notice) without going through APA notice and comment. The Notice imposed additional reporting obligations on captive insurance companies and their advisors. Failure to comply with the requirements could trigger substantial civil penalties that are not subject to deficiency procedures. Failing to comply with the reporting theoretically could result in criminal sanctions for willful noncompliance. CIC, a manager of captive insurance companies, and an individual who also managed captives and provides tax advice to them, sued. They claimed that the Notice imposed substantial costs and that the IRS effectively promulgated legislative rules without complying with the APA’s notice and comment requirements. The plaintiffs sought to enjoin the IRS from enforcing the Notice and asked the district court to issue a declaratory judgment claiming that the notice was invalid.
The district court dismissed the suit, and the Sixth Circuit affirmed. That led to the petition for rehearing and last month’s brief but telling order accompanied by two concurring opinions and a dissent. In rejecting the petition for rehearing, one of the concurring opinions (authored by Judge Clay, who wrote the majority Sixth Circuit opinion), largely stuck to his guns and framed the issue as one that is covered by existing AIA precedent:
A suit seeking to preemptively challenge the regulatory aspect of a regulatory tax “necessarily” also seeks to preemptively challenge the tax aspect of a regulatory tax because invalidating the former would necessarily also invalidate the latter. Bob Jones Univ.,; see also NFIB, (“The present challenge to the mandate thus seeks to restrain the penalty’s future collection.” (emphasis added)). Otherwise, a taxpayer could simply “characterize” a challenge to a regulatory tax as a challenge to only the regulatory aspect of the tax and thereby evade the AIA. Fla. Bankers,. And “as the Supreme Court has explained time and again . . . the [AIA] is more than a pleading exercise.” see also RYO Machine, LLC v. U.S. Dep’t of Treasury, (6th Cir. 2012) (“Regardless of how the claim is labeled, the effect of an injunction here is to interfere with the assessment or collection of a tax. The plaintiff is not free to define the relief it seeks in terms permitted by the [AIA] while ignoring the ultimate deleterious effect such relief would have on the Government’s taxing ability.” (quotation and many citations omitted)).
Judge Sutton also concurred in the opinion denying the petition but his concurrence has a different flavor altogether.
(As an aside, this summer I listened to the very entertaining Malcom Gladwell podcast Revisionist History. Season 4 Episode 1 (Puzzle Rush) and Episode 2 (The Tortoise and the Hare) feature Judge Sutton as one of the protagonists in Gladwell’s take down of the LSAT and the metrics for deciding who should gain entry into the nation’s elite law schools. Spoiler: Judge Sutton, who clerked for the late Justice Scalia and who attended the very respectable but not top five Moritz College of Law at THE Ohio State University is Gladwell’s poster child for why the LSAT and for that matter the way most law schools test students are in need of a major makeover).
For one thing, Judge Sutton states that he agrees with the dissent’s view on the merits of whether the AIA prevents the courts from hearing the challenge to the Notice. Yet, Judge Sutton still believes that the case was not appropriate for an en banc hearing. His reason is that the Supreme Court, rather than the entire Sixth Circuit, should step in:
[T] his case does not come to us on a fresh slate. Whatever we might do with the issue as an original matter is not the key question. As second-tier judges in a three-tier court system, our task is to figure out what the Supreme Court’s precedents mean in this setting. That is not easy because none of the Court’s precedents is precisely on point and because language from these one-off decisions leans in different directions.
Judge Sutton notes that the views are fairly well drawn on the issue—between the dissent in the panel opinion and the dissent in the denial of the petition by Judge Thapar, as well as the Florida Bankers DC Circuit opinion (authored by now Justice Kavanaugh) there is enough fodder for the Supreme Court to put together the seemingly (although not necessarily) contradictory approaches in the Direct Marketing and circuit court precedent on the reach of the AIA:
The last consideration is that we are not alone. The key complexity in this case—how to interpret Supreme Court decisions interpreting the statute—poses fewer difficulties for the Supreme Court than it does for us. In a dispute in which the Court’s decisions plausibly point in opposite directions, it’s worth asking what value we would add to the mix by en-bancing the case in order to create the very thing that generally prompts more review: a circuit split. As is, we have Judge Thapar’s dissental and Judge Nalbandian’s dissent at the panel stage on one side and Judge Clay’s opinion for the court on the other. These three opinions together with then-Judge Kavanaugh’s opinion say all there is to say about the issue from a lower court judge’s perspective. All of this leaves the Supreme Court in a well-informed position to resolve the point by action or inaction—either by granting review and reversing or by leaving the circuit court decisions in place.
The final part of the denial is Judge Thapar’s stinging dissent. Taking up the mantle of Judge Nalbandian’s dissent in the Sixth Circuit panel opinion, Judge Thapar discusses the differing legal takes on the reach of the AIA (and whether challenges to reporting requirements that are backstopped by penalties really count as a challenge to a tax rather than a challenge to the reporting requirement), but he also ups the rhetoric around how the majority approach to the AIA is out of sorts with broader principles of fairness. He warns of the parade of horribles associated with unchecked IRS power and a read of the AIA that requires parties to violate tax rules (and possibly have to go to jail) to get their day in court. For good measure, he points to how the IRS (at Congress’ direction) has taken on a more expansive role in society beyond collecting revenues. This mission creep of the IRS makes the exceptional approach to the timing of when agency guidance is subject to challenge less justifiable. Absence of a right to pre-enforcement challenge, according to Judge Thapar, is inconsistent with principles of our constitutional system of checks and balances:
The Founders gave Congress the “Power To lay and collect Taxes.” U.S. Const. art. I , § 8 , cl. 1. They limited this power to Congress because they understood full well that “the power to tax involves the power to destroy.” M’Culloch v. Maryland, 17 U.S. 316 ,431 (1819) (Marshall, C.J.). But today, the IRS (an executive agency) exercises the power to tax and to destroy, in ways that the Founders never would have envisioned. E.g., In re United States ( NorCal Tea Party Patriots ), 817 F.3d 953 (6th Cir. 2016). Courts accepted this departure from constitutional principle on the promise that Congress would still constrain agency power through statutes like the Administrative Procedure Act. 5 U.S.C. § 500 et seq. We now see what many feared: that promise is often illusory.
Conclusion
Underlying the technical legal issues surrounding the reach of the AIA are fundamental policy questions concerning the power that the IRS has to issue guidance that is effectively and at times practically absent from meaningful court review. There are many good reasons for rethinking the path that requires taxpayers to not comply before having an institutional check on the IRS’s fidelity to the APA—especially if the challenged tax or penalty is not subject to deficiency procedures. As Judge Clay notes in his opinion affirming the denial of the petition, these policy questions raise issues that seem to call for a legislative fix. I discussed the need for possible legislation in a post earlier this year in the post Is it Time to Reconsider When IRS Guidance is Subject to Court Review? In the absence of legislation, the opinions accompanying the denial of the request for en banc provide a strong signal that this issue is headed to the Supreme Court. CIC may be the vehicle that gets it there.