The outcome of a case now before the U.S. Supreme Court may lessen the uncertainty caused by past court decisions over the scope of legal protections for tax regulatory actions.
The case concerns the Anti-Injunction Act, a Civil War-era statute that generally bars lawsuits trying to restrain tax assessment or collection. Courts have often interpreted the act to block challenges to tax regulatory actions that haven’t yet been enforced against a taxpayer. That interpretation distinguishes court treatment of Treasury Department regulatory actions from those of other federal agencies, which typically face such lawsuits.
The issue matters to both Treasury and taxpayers because a high court ruling reversing the U.S Court of Appeals for the Sixth Circuit’s dismissal of CIC Services LLC’s lawsuit could spur more legal fights challenging tax rules and guidance.
“Tax practitioners are going to be very interested in the CIC Services decision on the merits” because it’s likely to clarify when challenges to statutes and regulations may be brought, said Stu Bassin, founder of the Bassin Law Firm PLLC. In the CIC Services case, which the Supreme Court announced it would take on Monday, the Tennessee firm is challenging a reporting requirement backed by a penalty.
In other areas, individuals may challenge government action before the government seeks to penalize them, said Bassin, who is representing a client in a separate Anti-Injunction Act case, Silver v. Internal Revenue Service.
Bassin cited the Supreme Court’s 1967 ruling in Abbott Laboratories. v. Gardner, which allowed challenges to federal agency regulation that hasn’t yet been enforced unless there is “clear and convincing evidence” that Congress didn’t want to allow the challenge.
Confusion about how far the Anti-Injunction Act goes in creating an exception to that general principle has been spurred by Supreme Court and appellate rulings in the past decade.
In its 2011 decision in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court said that it wasn’t inclined “to carve out an approach to administrative review good for tax law only” without justification. That caused onlookers to wonder whether the court was growing skeptical of a tradition of treating tax regulation differently, including through the protections of the Anti-Injunction Act.
The court’s subsequent decisions have pointed in different directions.
In 2012, the high court maintained a broad reading of the act, saying in National Federation of Independent Business v. Sebelius that a regulation backed by a penalty labeled a “tax” under the applicable part of the tax code would be protected from pre-enforcement lawsuits by the Anti-Injunction Act.
Then, in 2015, in Direct Marketing Ass’n v. Brohl, some thought the justices signaled they would be interested in curtailing the act’s application. The court interpreted a somewhat similar statute dealing with state regulatory action—the Tax Injunction Act—so as not to block a federal lawsuit dealing with a reporting requirement backed by a penalty.
“Applying the correct definition, a suit cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities,” Justice Clarence Thomas wrote in the Direct Marketing opinion.
The Supreme Court has been speaking out of both sides of its mouth on this issue, said Andy Grewal, a professor at the University of Iowa’s College of Law.
Direct Marketing was a “pretty good sign that the Anti-Injunction Act was not a bar” to this kind of challenge, Grewal said, but “it’d be naive to say that everything in the Supreme Court case law supports that.”
Kavanaugh Cites Precedent
In the same year now-Justice Brett Kavanaugh—then serving as a judge on the U.S. Court of Appeals for the District of Columbia Circuit—wrote in Florida Bankers Association v. Treasury that a bank couldn’t bring a pre-enforcement lawsuit against a penalty-backed reporting requirement.
“The Supreme Court has consistently ruled—and most recently indicated as well in NFIB—that plaintiffs cannot evade the Anti-Injunction Act by purporting to challenge only the regulatory aspect of a regulatory tax,” Kavanaugh wrote.
The Supreme Court declined to review that decision.
Not all appeals judges have agreed with that interpretation. Multiple Sixth Circuit judges dissented in CIC Services and Judge Jeffrey Sutton wrote separately that the high court’s decisions “plausibly point in opposite directions.”
The CIC Services case gives the Supreme Court another chance to offer clearer direction on when Treasury’s regulatory actions can be challenged in court.
“However the case is resolved, I think the tax community will welcome clarification of the Anti-Injunction Act’s meaning in light of Mayo Foundation and subsequent developments,” said Kristin Hickman, a professor at the University of Minnesota Law School, who wrote a third-party brief supporting the cert petition.