May 17, 2021
Decided May 17, 2021
CIC Services, LLC v. IRS, No. 19-930
Today, the Supreme Court unanimously held that the Anti-Injunction Act does not bar pre-enforcement judicial review of reporting mandates enforced by tax penalties, at least when a mandate is also enforced by criminal punishment.
CIC Services, LLC advises companies that create and use “captive insurers” to fill gaps in third-party insurance coverage. In 2016, the IRS issued Notice 2016-66, which imposes reporting and recordkeeping requirements for taxpayers and tax advisors involved in captive-insurance transactions—transactions the IRS believes can facilitate tax avoidance. If taxpayers or advisors violate these requirements, they face hundreds of thousands of dollars in civil tax penalties; for willful violations, they face criminal punishment, including imprisonment. CIC filed a pre-enforcement suit to challenge Notice 2016-66 under the Administrative Procedure Act, arguing that the IRS should have promulgated the Notice through notice-and-comment rulemaking, and that the Notice was arbitrary and capricious because it was issued without a proven need.
The Sixth Circuit held that CIC’s suit was barred by the Anti-Injunction Act, which prohibits suits “for the purpose of restraining the assessment or collection of any tax.” 26 U.S.C. § 7421(a). Because the Notice is enforced by a tax penalty, the Sixth Circuit ruled, CIC’s challenge to the Notice necessarily seeks to restrain the assessment or collection of that tax.
Whether the Anti-Injunction Act bars pre-enforcement challenges to reporting mandates enforced by tax penalties.
The Anti-Injunction Act does not bar pre-enforcement challenges to reporting requirements enforced by tax penalties that also impose independent legal obligations enforced by criminal punishment, such that the only alternative way of challenging the reporting mandate—violating it, paying the penalty, and then suing for a refund—requires committing a crime.
A suit “to enjoin a standalone reporting requirement, whose violation may result in both tax penalties and criminal punishment … is not a suit ‘for the purpose of restraining the [IRS’s] assessment or collection’ of a tax, and so does not trigger the Anti-Injunction Act.”
Justice Kagan, writing for the Court
What It Means:
The Court’s opinion is available here.
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