Cic Servs., LLC v. Internal Revenue Serv., 19-930

• Court: United States Supreme Court
• Writing for the Court: Justice KAGAN delivered the opinion of the Court.
• Citation: 209 L.Ed.2d 615,141 S.Ct. 1582
• Parties: CIC SERVICES, LLC, Petitioner v. INTERNAL REVENUE SERVICE, et al.
• Docket Number: No. 19-930,19-930
• Decision Date: 17 May 2021

141 S.Ct. 1582
209 L.Ed.2d 615

CIC SERVICES, LLC, Petitioner
v.
INTERNAL REVENUE SERVICE, et al.

No. 19-930

Supreme Court of the United States.

Argued December 1, 2020
Decided May 17, 2021

Jeffrey B. Wall, Acting Solicitor General, Counsel of Record, Richard E. Zuckerman, Principal Deputy Assistant, Attorney General, Malcolm L. Stewart, Deputy Solicitor General, Jonathan C. Bond, Assistant to the Solicitor General, Ellen Page DelSole, Bethany B. Hauser, Attorneys, Department of Justice, Washington, DC, for Respondents.

Adam R. Webber, Elliott, Faulkner & Webber, Beavercreek, OH, Patrick Strawbridge, Consovoy McCarthy PLLC, Boston, MA, Kenneth A. Lazarus, Lazarus & Associates, 1025 Thomas Jefferson St. NW, Washington, DC, Bryan Weir, Cameron T. Norris, Consovoy McCarthy PLLC, Arlington, VA, for Petitioner.

Justice KAGAN delivered the opinion of the Court.

141 S.Ct. 1586

The Anti-Injunction Act, 26 U.S.C. § 7421(a), bars any "suit for the purpose of restraining the assessment or collection of any tax." The question here is whether the Act prohibits a suit seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties. We hold that the Act does not preclude the suit.

I

Americans have never had much enthusiasm for paying taxes. The Nation's first income taxes—adopted to finance the Civil War—met with considerable (one might even say "taxing") legal resistance. See Hickman & Kerska, Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev. 1683, 1723–1725 (2017). Some taxpayers, alleging the taxes illegal, sought to enjoin collection efforts. And some courts granted the requested relief. See, e.g. , Roback v. Taylor , 20 F.Cas. 852, 854 (No. 11,877) (CC SD Ohio 1866); Bank for Savings v. Collector , 3 Wall. 495, 18 L.Ed. 207 (1866). Those rulings disrupted the flow of revenue to the Federal Government. As one late-19th century treatise writer described the problem, "improvident employment of the writ of injunction" threatened to "seriously embarrass" tax-dependent "operations of the government." T. Cooley, Law of Taxation 536–537 (2d ed. 1886).

Congress responded by enacting the Anti-Injunction Act. See Act of Mar. 2, 1867, § 10, 14 Stat. 475. In its current form (differing little from the original), the Act provides: "[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." 26 U.S.C. § 7421(a). The Act, we have stated, "protects the [Federal] Government's ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes." National Federation of Independent Business v. Sebelius , 567 U.S. 519, 543, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012) ( NFIB ). Because of the Act, a person can typically challenge a federal tax only after he pays it, by suing for a refund. See ibid.

In an ordinary Anti-Injunction Act case, that short primer on the statute would naturally bring us to a description of the tax under dispute. But describing the tax implicated here will have to wait. For that tax—the thing that raises the Anti-Injunction Act question—comes into play only at the back end of a complex information-reporting scheme. The reporting scheme itself is where we must begin.

As every taxpayer knows, the Internal Revenue Service (IRS) has broad

141 S.Ct. 1587

power to require the submission of tax-related information that it believes helpful in assessing and collecting taxes. See § 6011(a). Those reporting rules may apply not just to taxpayers but also to "material advisors"—individuals or entities that earn income from providing taxpayers with certain kinds of "aid, assistance, or advice." § 6111(b)(1)(A); see § 6111(a). This case starts with requirements that taxpayers and material advisors provide detailed information about what the Internal Revenue Code calls "reportable transaction[s]." § 6707A(c)(1). The Code describes those transactions simply as ones that "hav[e] a potential for tax avoidance or evasion." Ibid. Rather than give further specifics, the Code delegates to the Secretary of the Treasury, acting through the IRS, the task of identifying particular transactions with the requisite risk of tax abuse. See §§ 6011, 6707A(c)(1).

Using that authority, the IRS determined that so-called micro-captive transactions must be reported because of their potential for tax evasion. A micro-captive transaction is typically an insurance agreement between a parent company and a "captive" insurer under its control. The Code provides the parties to such an agreement with tax advantages. The insured party can deduct its premium payments as business expenses. See § 162(a). And the insurer can exclude up to $2.2 million of those premiums from its own taxable income, under a tax break for small insurance companies. See § 831(b). The result is that the money does not get taxed at all. That much, for better or worse, is a congressional choice. But no tax benefit should accrue if the money is not really for insurance—if the insurance contract is a sham, which the affiliated companies have entered into only to escape tax liability. And according to the IRS, some micro-captive transactions are of that kind. So the IRS issued Notice 2016–66 identifying certain micro-captive agreements as reportable transactions. See 2016–47 Cum. Bull. 745. That Notice compels taxpayers and material advisors associated with such an agreement to (among other things) "describe the transaction in sufficient detail for the IRS to be able to understand [its] tax structure." Id. , at 748. With that information, the IRS can check for facts—like coverage for an "implausible risk" or premiums that "significantly exceed" prevailing rates—suggesting that the taxpayer is not entitled to the tax benefit it claims. Id., at 745–746.

Noncompliance with Notice 2016–66 subjects a taxpayer or material advisor to stiff penalties—at last bringing us to the tax involved in this case, as well as to non-tax criminal consequences. By statutory provision, all failures to supply required information on reportable transactions, including the micro-captive transactions specified in the Notice, are punishable by civil monetary penalties—$50,000 for advisors and up to that amount (depending on the amount of tax gain realized) for taxpayers. See §§ 6707(b), 6707A(b). In addition, an advisor may incur a daily $10,000 penalty for failing to furnish, on request, a list of the people it advised on a reportable transaction. See §§ 6708(a), 6112(a). And critically here, all those penalties are "deemed" to be "tax[es]" for purposes of the Code—including the AntiInjunction Act. § 6671(a). So, again, the civil penalties for violating Notice 2016–66 are tax penalties, and must be treated as such. But no sooner do we find the tax appended to the Notice's reporting scheme than we encounter something else. Under the Code, any person who "willfully" breaches an IRS reporting requirement is also subject to criminal penalties. § 7203. Such a violation is a misdemeanor, punishable by fines and up to one year in prison.

141 S.Ct. 1588

And, unsurprisingly, that criminal liability is not "deemed" a tax.

This suit challenges the lawfulness of Notice 2016–66. The petitioner is CIC Services, a material advisor to taxpayers participating in microcaptive transactions. It brought this action before the Notice's first reporting date, rather than after a reporting violation, let alone payment of penalty. (As far as we know, CIC has still not committed a violation, instead complying with the Notice while pressing this suit.) CIC's complaint mainly asserts that the IRS violated the Administrative Procedure Act (APA) by issuing the Notice without notice-and-comment procedures. The complaint also alleges that the Notice is arbitrary and capricious under the APA because it imposes new reporting requirements without proven need. So the complaint asks the court to "set[ ] aside IRS Notice 2016–66"—more specifically, to "enjoin the enforcement of Notice 2016–66 as an unlawful IRS rule" and to "declar[e] that Notice 2016–66 is unlawful." Complaint in No. 17–CV–110 (ED Tenn., Mar. 27, 2017), Doc. 1, pp. 2, 16 (Complaint).

But the suit has not yet proceeded to the merits. The Government moved to dismiss the action based on the Anti-Injunction Act, arguing that CIC's "requested relief would prevent the IRS from assessing a tax penalty against material advisors" that disregard the Notice's reporting requirements. Motion to Dismiss in No. 17–cv–110 (ED Tenn., May 30, 2017), Doc. 25–1, p. 9. In the Government's view, the way for CIC to bring its claims is to disobey the Notice and then sue for a refund of any resulting tax penalty. The District Court agreed. It reasoned that CIC's suit sought "to restrain the IRS's assessment or collection" of the tax penalty that could be imposed for noncompliance. 2017 WL 5015510, *4 (ED Tenn., Nov. 2, 2017). The Court of Appeals for the Sixth Circuit affirmed in a divided decision. According to the majority, CIC's suit would "restrain (indeed eliminate)" the tax penalty by "invalidat[ing] the Notice, which is [that tax's] entire basis." 925 F.3d 247, 255 (2019). Judge Nalbandian dissented. "[T]his is not," he wrote, "a dispute over taxes": "[A] suit to enjoin the enforcement of a reporting...