Briefing Underway in CIC Services

The opening briefs have now been filed in CIC Services, which involves the applicability of the Anti-Injunction Act, 26 U.S.C. § 7421(a), to an Administrative Procedure Act challenge to a reporting requirement that carries with it a “tax” penalty for noncompliance. See our prior report here. Showing a restraint that is fairly unusual today in Supreme Court litigation, the taxpayer’s brief (linked below) comes in well under the maximum length permitted by the Court’s rules. Showing somewhat less restraint, a variety of organizations and individuals filed a total of ten different amicus briefs in support of the taxpayer’s position.

The taxpayer’s brief argues that this is a simple case, controlled by the statutory text. In particular, the taxpayer argues that use of the terms “assessment” and “collection” in the statute refute the notion that it could apply to a challenge to a reporting requirement. According to the taxpayer, the prohibition against suits that “restrain” those activities means that the statute applies to “suits that actually stop the assessment or collection of a tax–not suits that merely inhibit future assessment or collection.” The brief relies for support on both the opinion of the Sixth Circuit judges dissenting from denial of en banc review and on Direct Marketing Ass’n v. Brohl, 575 U.S. 1 (2015), a Supreme Court decision involving the Tax Injunction Act, 28 U.S.C. § 1341, which the taxpayer describes as “a similarly worded state tax analog.”

The taxpayer makes two additional points apart from its focus on the statutory text. It argues that the Sixth Circuit’s decision frustrates the policy of the APA to facilitate pre-enforcement review while doing nothing to advance the purposes of the Anti-Injunction Act. And the taxpayer argues that the Sixth Circuit’s decision creates an unconstitutional system by allowing a taxpayer to challenge the reporting requirement only by first violating the requirement and thus exposing itself to criminal liability.

The government’s answering brief is due September 8.

CIC Services – Opening Brief for Taxpayer

Supreme Court to Hear Tax Anti-Injunction Act Dispute in the Fall

The Supreme Court granted certiorari in CIC Services, LLC v. IRS, No. 19-930, to address the scope of the Tax Anti-Injunction Act, 26 U.S.C. § 7421(a). The briefing in the case will occur over the summer, with oral argument to occur sometime in the fall.

The basic issue in the case is how narrowly to read the Act’s prohibition on actions seeking to enjoin “the assessment or collection of any tax.” That prohibition means taxpayers who dispute a tax assessment must pay their taxes first before they can litigate the dispute in a refund suit. The CIC case, however, did not involve a tax assessment or, really, tax liability at all (except in a very tangential way). Rather, the dispute was over the validity of an IRS notice imposing reporting and recordkeeping obligations on taxpayers entering into certain “micro-captive” insurance transactions. The plaintiffs sought to halt enforcement of the notice on the ground that it did not comport with APA notice-and-comment requirements. The district court, however, agreed with the IRS that the suit was barred by the Anti-Injunction Act because taxpayers who failed to report their transactions were subject to penalties that are classified by the Code as “taxes,” and the suit would have the effect of restraining the imposition of those penalties. The court reasoned that the lawsuit “necessarily operate[d] as a challenge to both the reporting requirement and the penalty or tax imposed for failure to comply with the reporting requirement.”

A sharply divided Sixth Circuit affirmed, denying the plaintiffs’ petition for a rehearing en banc by a narrow 8-7 vote. On top of that, Judge Sutton, who provided the swing vote for denial, wrote separately to explain that he thought the dissenters had the better reading of the Act but that the issue ultimately turned on the meaning of Supreme Court precedent and should be resolved by that Court without an unnecessary detour into en banc review.

Building off the dissents in the Sixth Circuit, and supported by several amicus briefs, the taxpayer argued in its cert petition that the decision below meant that “even patently unlawful IRS regulations can be insulated from review unless an individual is willing to risk the imposition of enormous fines and—in this case—prison time.” The government devoted most of its response to defending the Sixth Circuit’s construction of the statute on the merits, without saying much about the policy implications. The Supreme Court was persuaded that it needs to step in and resolve the issue, which may bode well for the taxpayer’s position.

The taxpayer’s opening brief is due July 15, and the government’s response is due September 8. The Court has not yet scheduled an argument date, but a November or early December date is likely.

Linked below is the cert petition (with an attached appendix that includes the decisions of the courts below), the government’s brief in opposition, and the taxpayer’s reply brief.

CIC Petition for Certiorari

Government Brief in Opposition in CIC

CIC Reply in Support of Certiorari Petition

Supplemental Briefing Completed in Altera

Attached are the four supplemental briefs filed by the parties in the Altera case.  First, in anticipation of the reargument of the case, with Judge Graber now sitting on the panel in place of the deceased Judge Reinhardt, the court invited the parties to file supplemental briefs limited to half of the length of a normal court of appeals brief.  This briefing opportunity was designed to give the parties the chance to restate or add to their arguments on the issues previously addressed in the case, having now had the opportunity to read the competing opinions of Judges Reinhardt and O’Malley that had been vacated.  Although the court’s order took pains to tell the parties that they were “permitted, but not obligated,” to file “optional” supplemental briefs, it will surprise no one that both parties took advantage of the option and filed supplemental briefs on September 28 that pressed right up against the 6500 word limit.  In addition to the parties’ briefs, four supplemental amicus briefs were filed by:  1) the Chamber of Commerce; 2) a group of trade associations; 3) Cisco; and 4) a group of law school professors, with that last one being in support of the government.

This deluge of paper, however, was not enough for the panel.  On the same day that the supplemental briefs were due, the court issued the following order inviting another set of supplemental briefs on the question whether Altera’s suit was barred by the statute of limitations:

“The parties should be prepared to discuss at oral argument the question as to whether the six-year statute of limitations applicable to procedural challenges under the Administrative Procedure Act, 28 U.S.C. 2401(a), applies to this case and, if it does, what the implications are for this appeal. Perez-Guzman v. Lynch, 835 F.3d 1066, 1077-79 (9th Cir. 2016), cert. denied, 138 S. Ct. 737 (2018). Additionally, the parties are permitted, but not obligated, to file optional simultaneous supplemental briefs on this question on or before October 9, 2018. The briefs should be no longer than 6,500 words [that is, half the length of an ordinary appellate brief].”

The court’s injection of this new issue into the case was potentially a very significant development.  If the court were to conclude that Altera’s APA challenge was barred by the statute of limitations, the Ninth Circuit decision in Altera would not shed any light on any of the important issues thought to be presented involving the APA or the substance of the cost-sharing regulations.

In the end, however, it appears that the court’s latest order will not amount to anything.  Altera filed a full-fledged supplemental brief in response to the court’s order in which it raised several objections to the court’s suggestion, including an argument that the government had waived any possible statute of limitations claim.

More significantly, the government did not embrace the court’s suggestion either.  The government simply filed a short letter brief in which it stated that any prepayment suit filed by Altera within the six-year limitations period would have been barred by the Tax Anti-Injunction Act.  (In this connection, the government cited to its brief in the Chamber of Commerce case; see our coverage of that appeal here.)  Hence, the government acknowledged that it would be “unfair” to Altera if that six-year period were held to bar its later suit because that would have the effect of depriving Altera of any ability to sue in the Tax Court.   Moreover, the government noted that the limitations period is not “jurisdictional” and therefore, even if it would otherwise be applicable, the government had waived its right to invoke a limitations defense just as Altera argued in its brief.  The government concluded by stating its position that the six-year statute of limitations that is generally applicable to  APA challenges “does not apply to this case.”  Thus, there is no realistic possibility that the Ninth Circuit will toss the case on statute of limitations grounds, and it can be expected to address the important issues presented by the Tax Court’s opinion.

The oral argument is scheduled for October 16.

Altera – Altera Supplemental Brief

Altera – Government Supplemental Brief

Altera – Altera Statute of Limitations Supplemental Brief

Altera – Government Statute of Limitations Letter Brief

Supplying Some Missing Links

In addition to providing analysis and updates on pending tax appeals, this blog is intended to serve as a resource where readers can easily access the briefs and relevant opinions in those cases.  Because of the press of business and other reasons, the posting of a couple of the opinions in cases we have discussed has slipped through the cracks.  So we are providing links to those opinions here, even though the opinions are long past the point of “breaking news”:

The Second Circuit’s decision in TIFD (“Castle Harbour”), once again reversing the district court and holding that the banks did not qualify as partners under § 704(e)(1), and that the government could impose a penalty on the taxpayer for substantial understatement of income.

The Eleventh Circuit’s decision in Calloway, affirming the Tax Court and holding that the transaction in question was properly treated as a sale, not a loan, and upholding the penalties.  The decision approves the multi-factor approach employed by the Tax Court majority, and notes infirmities in the alternative analytical approaches suggested by Judges Halpern and Holmes in their respective concurring opinions.

The Supreme Court’s decision upholding the Affordable Care Act (linked below).  The opinion was eventually entitled NFIB v. Sebelius, although we had covered it using the caption of one of the companion cases, HHS v. Florida.  The discussion of the Anti-Injunction Act, the issue that was covered in the blog, is found at pages 11-15 of the Court’s slip opinion.  Our prior coverage (linked here only so that I can show off my against-the-mainstream prediction that the legislation would survive) can be found here and here.  The majority’s key holding that the individual mandate could be upheld as an exercise of the Taxing Power is found at pp. 33-44.

NFIB v. Sebelius Supreme Court decision (Affordable Care Act)

 

Supreme Court Debates Whether Anti-Injunction Act Is Jurisdictional

As we previously reported, Day 1 of last week’s oral argument in the Supreme Court on the challenges to the health care legislation focused on whether the Anti-Injunction Act bars the lawsuits.  The excitement about the argument on that issue was largely gone as soon as it was over, because it was fairly apparent that the Court will not find the Act to be an obstacle to reaching the merits of the health care dispute.  Indeed, Robert Long, the lawyer who argued as amicus for that position, has predicted that he will not get a single vote.  Certainly the argument was almost completely forgotten by the next day when the Court’s questioning on the constitutionality of the individual mandate led many observers to conclude that the mandate will be invalidated.  (For the record, my opinion is that the health care legislation will survive, but that topic is beyond the scope of this blog.)  Still, the Court’s decision to reject the applicability of the Anti-Injunction Act could have precedential significance, depending on the rationale that the Justices use.  Therefore, we briefly recount the argument here with that issue in mind.

There were two basic arguments made for holding that the health care lawsuits could proceed despite the Anti-Injunction Act.  The primary argument was that the Act by its terms did not apply — that is, that for a variety of reasons the “penalty” for failing to obtain health insurance is not a “tax” within the meaning of the Anti-Injunction Act.  Both the challengers to the health care legislation and the United States took this position.  Preliminary to this statutory interpretation question, however, was the argument that the Anti-Injunction Act should not apply in this case — even if the health care penalty would ordinarily come within the ambit of the Anti-Injunction Act — because the government had waived the defense and urged that the lawsuits should proceed.  The validity of that waiver argument turns on whether the Anti-Injunction Act is “jurisdictional,” meaning that it addresses a court’s jurisdiction or power to hear a case, as opposed to being a “claim processing rule.”

A court does not have the authority to create its own jurisdiction, even if both parties want it to hear the case.  Thus, if a statute is “jurisdictional,” a court is obliged to examine jurisdiction on its own and to dismiss the case if it finds that the statutory conditions are not met.  Conversely, if a statutory condition is not jurisdictional, then a party can waive satisfaction of that condition and the court can proceed to hear the case.  (For example, many exhaustion requirements or statutes of limitations are not jurisdictional, see Reed Elsevier, Inc. v. Muchnick, 130 S. Ct. 1237 (2010); Day v. McDonough, 547 U.S. 198, 205-06 (2006)).  In the health care litigation, although the United States wanted the lawsuits to proceed, it took the position that the Anti-Injunction Act is “jurisdictional” and therefore (in contrast to the challengers to the law) argued that the Court could proceed to hear the case only if it concluded that the Anti-Injunction Act by its terms did not apply to the “penalty” for failing to obtain insurance.

If the Court were to resolve the case on waiver grounds, concluding that the Anti-Injunction Act is not jurisdictional, that could create opportunities for taxpayers in future cases if a government attorney overlooks an Anti-Injunction Act defense.  It also would give the government flexibility to assert the defense when it wants, but to allow cases like the health care challenge to go forward if the government determines that it wants a prompt answer.  The government, however, is concerned about a holding that the Anti-Injunction Act is not jurisdictional, because courts are freer to adopt equitable exceptions to non-jurisdictional statutes.

At the oral argument, the Justices explored both possible grounds for resolving the issue.  Chief Justice Roberts and Justice Alito seemed the most interested in concluding that the Act is not jurisdictional and thus giving effect to the government’s waiver.  Roberts described as the “biggest hurdle” to the Anti-Injunction Act argument a 1938 case in which the Court had gone ahead and decided an issue apparently barred by the Act after the government had waived its defense.  When counsel responded that the case was no longer good law and pointed out that the Court had since repeatedly referred to the Act as “jurisdictional,” Alito forced him to concede that the Court had never actually held that the statute was “jurisdictional” in a case where that characterization would make a difference.  Justices Ginsburg, Kagan, and Sotomayor all joined in that line of questioning, pointing to similarly worded statutes or precedents that in Justice Sotomayor’s words indicated that “Congress has accepted that in the extraordinary case we will hear the case.”

As the argument progressed, however, it appeared less likely that a majority would coalesce around this position.  Justice Breyer volunteered that he was inclined to agree that the Anti-Injunction Act is jurisdictional, but that he doubted it applied to the health care legislation.  Sotomayor indicated that she thought this position, which is what was being espoused by the government, was the least problematic.  Justice Ginsburg suggested that she sided with the position that the Act did not apply, observing that this conclusion would make it unnecessary to resolve the thornier “jurisdictional” question.

Although it is always hazardous to predict outcomes based on questions asked at oral argument, the most likely outcome appears to be that the majority of Justices will address the merits of the Anti-Injunction Act issue, rather than relying on the government’s waiver of the defense.  If so, the decision will not foreclose courts in the future from applying the Anti-Injunction Act when the government has failed to raise the defense or deliberately chosen not to raise it.

A decision is expected in the last week of June, perhaps June 28, and will surely be overshadowed by the Court’s contemporaneous decision on the constitutionality of the health care legislation.

Tax Anti-Injunction Act Issue Set to Lead Off Supreme Court Consideration of Health Care Act

The Supreme Court is preparing to hold oral arguments on its long-awaited consideration of the constitutionality of the health care legislation.  The arguments will cover four distinct issues in three different cases and occur over three days, March 26-28.  The most prominent issue, of course, is whether the “individual mandate” requiring almost everyone to have health insurance is constitutional.  Additional issues are “severability” (whether the entire law must be struck down if the individual mandate provision is unconstitutional or whether other portions of the law can survive) and whether the Medicaid expansion provisions of the law are impermissibly “coercive.”

But leading all of this off on March 26 in HHS v. Florida, No. 11-398, is a tax issue – whether the challenges to the law are barred by Code section 7421, the Tax Anti-Injunction Act.  Former Solicitor General Paul Clement is slated to argue the other three issues for the challengers to the law, but has left the tax issue for someone else.  He remarked (tongue-in-cheek, I believe) that the Court was playing a “practical joke” on the public in its scheduling and that the folks who wait in line all night to attend the first day of arguments on March 26 are going to end up sitting through “the most boring jurisdictional stuff one can imagine.”  Tax lawyers might disagree (or they might not).  Either way, the section 7421 issue could hijack the case and have the effect of prolonging the uncertainty over the constitutionality of the law for several more years.

The issue is simple on its face.  Section 7421 forbids federal courts from maintaining any suit “for the purpose of restraining the assessment or collection of any tax.”  Rather, one generally must wait until the tax is imposed and then contest the liability through a refund claim or in defending against an enforcement proceeding. The individual mandate in the statute is enforced by imposing a “penalty” on individuals who are required to purchase insurance but fail to do so.  The relevant provision is section 5000A of the Internal Revenue Code, which requires individuals to report on their tax return information about their compliance with the mandate and pay a penalty if necessary.  That Code section also generally provides that the amounts owed are to be assessed and collected in the same manner as other penalties under the Code.

If the health insurance penalty is a “tax” subject to section 7421, then the current challenges to the mandate (which in essence are challenging the imposition of a penalty for failure to purchase insurance) are premature.  Rather, the legality of the penalty would have to be contested after it is imposed, like other taxes.  The individual mandate does not kick in until 2014, so an income tax return that self-reports penalty liability, thereby potentially triggering an assessment, would not be filed until 2015.  The Fourth Circuit adopted this view and dismissed a suit challenging the health care statute, telling the plaintiffs to come back in a few years.  Other circuits have disagreed, finding that, despite its presence in the Code and linkage to the assessment procedures for more conventional tax penalties (which are generally treated as “taxes”), the health care penalty has nothing to do with income tax and ought not to be governed by section 7421.  Of course, the issue is not that simple.   A concise and more nuanced summary of the respective arguments can be found in this article (see page eight) by our colleague George Hani.

One interesting sidelight to the Court’s consideration of this issue is that the Court had to appoint counsel to argue that section 7421 bars the suit.  The challengers, of course, have argued all along that section 7421 is no bar.  The government initially raised section 7421 as a defense, but later reversed course and abandoned that position because it did not want uncertainty over the legislation’s legality to linger.  Thus, in the Supreme Court, both sides are arguing that section 7421 does not bar the lawsuit.  The Court appointed Robert Long, an experienced Supreme Court practitioner, as an amicus curiae to brief and argue the position that section 7421 does bar the suit.

The oral argument on the morning of March 26 will proceed as follows:  Robert Long, arguing as amicus for 40 minutes that the challenges are barred; Solicitor General Donald Verrilli, arguing for the government for 30 minutes that section 7421 does not bar the challenges, and Gregory Katsas, arguing for the challengers for 20 minutes also that section 7421 does not bar the challenges.

The Court has announced that a transcript and audio of the argument will be posted on its website by 2:00 that afternoon.  We will be back sometime after that with some observations on the argument.

The Supreme Court briefs filed on this issue can be found here.  The Court is likely to issue its decision during the last week of June.