Cic Servs., LLC v. Internal Revenue Serv.

• Decision Date: 22 May 2019
• Docket Number: No. 18-5019,18-5019
• Citation: 925 F.3d 247
• Parties: CIC SERVICES, LLC, Plaintiff-Appellant, v. INTERNAL REVENUE SERVICE; Department of Treasury; United States of America, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

925 F.3d 247

CIC SERVICES, LLC, Plaintiff-Appellant,

v.INTERNAL REVENUE SERVICE; Department of Treasury; United States of America, Defendants-Appellees.

No. 18-5019

United States Court of Appeals, Sixth Circuit.

Argued: October 19, 2018

Decided and Filed: May 22, 2019

CLAY, Circuit Judge.

Plaintiff CIC Services, LLC appeals the district court’s November 2, 2017 order granting Defendants’ motion to dismiss Plaintiff’s complaint for lack of subject matter jurisdiction. Plaintiff’s complaint alleges that Defendants’ Notice 2016-66, 2016-47 I.R.B. 745 was promulgated in violation of the Administrative Procedure Act, 5 U.S.C. § 500 et seq. and the Congressional Review Act, 5 U.S.C. § 801 et seq. , and seeks to enjoin its enforcement. For the reasons that follow, we AFFIRM the district court’s dismissal.

BACKGROUND

Factual Background

As a part of the American Jobs Creation Act of 2004, Congress delegated authority to the Internal Revenue Service ("IRS") to identify and gather information about potential tax shelters. See 26 U.S.C. § 6707A. In exercising that authority, the IRS requires taxpayers and certain third parties to maintain and submit records pertaining to any "reportable transaction[s]." Id. § 6707A(c). Reportable transactions are those transactions deemed as such by IRS regulations. Id .

Failure to adhere to these IRS requirements can result in significant penalties. For instance, a taxpayer who fails to submit to the IRS a return listing his or her reportable transactions faces a penalty of 75% of his or her tax savings resulting from those transactions, from a minimum of $ 5,000 to a maximum of $ 200,000. Id. §§ 6011, 6707A(b). A "material advisor"—one who provides material aid to a taxpayer in his or her carrying out reportable transactions and who derives a threshold amount of gross income from that aid, see id. § 6111(b)—faces similar penalties. For instance, a material advisor who fails to submit to the IRS a return listing the reportable transactions in which he or she aided faces a penalty of between $ 50,000 and $ 200,000. Id. §§ 6111(a), 6707(b). And a material advisor who fails to maintain a list of the taxpayers that he or she aided in carrying out reportable transactions faces a penalty of $ 10,000 per day if the list is not produced within 20 business days of a request from the IRS. Id. §§ 6112(a), 6708(a).

On November 21, 2016, Defendants published Notice 2016-66 (the " Notice").¹ See 2016-47 I.R.B. 745.The Notice identified certain "micro-captive transactions" as "transactions of interest," a subset of reportable transactions.² Id. ; see also 26 C.F.R. § 1.6011-4(b). The Notice explained that these transactions have "a potential for tax avoidance or evasion," but that the IRS "lack[s] sufficient information" to distinguish between those that are lawful and those that are unlawful. 2016-47 I.R.B. 745. By deeming these transactions to be reportable transactions, the Notice imposed the requirements and potential penalties noted above on taxpayers engaging in them, and on material advisors aiding in them. Id.

Procedural History

On March 27, 2017, Plaintiff, a material advisor to taxpayers engaging in micro-captive transactions, filed a complaint in the United States District Court for the Eastern District of Tennessee. Plaintiff’s complaint alleges that Defendants promulgated Notice 2016-66 in violation of the Administrative Procedure Act ("APA"), 5 U.S.C. § 500 et seq. and the Congressional Review Act ("CRA"), 5 U.S.C. § 801 et seq. , and seeks to enjoin its enforcement. Specifically, Plaintiff alleges that the Notice (1) is a legislative rule that required notice-and-comment rulemaking, (2) is arbitrary and capricious, and therefore ultra vires , and (3) is a rule that required submission for congressional review before it could go into effect. Plaintiff also filed a motion for a preliminary injunction.

On April 21, 2017, the district court denied Plaintiff’s motion for a preliminary injunction, reasoning that it would not be in the public interest and that Plaintiff was unlikely to succeed on the merits. Defendants then moved to dismiss Plaintiff’s complaint for lack of subject matter jurisdiction. Defendants asserted that Plaintiff’s complaint was barred by the Anti-Injunction Act, 26 U.S.C. § 7421(a) and the tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201 (collectively, the "AIA"),³ which divest federal district courts of jurisdiction over suits "for the purpose of restraining the assessment or collection of any tax." On November 2, 2017, the district court granted Defendants’ motion to dismiss for lack of subject matter jurisdiction.

This appeal followed.

DISCUSSION

I. Standard of Review

We review de novo questions of subject matter jurisdiction, including whether a complaint is barred by the AIA. Lorillard Tobacco Co. v. Chester, Willcox & Saxbe , 589 F.3d 835, 843 (6th Cir. 2009). In reviewing a district court’s grant of a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), we accept all material allegations in the complaint as true and construe the complaint in the light most favorable to the nonmoving party. United States v. Ritchie , 15 F.3d 592, 598 (6th Cir. 1994).

II. Analysis

A. The AIA

The AIA provides that "no 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). While there exist some statutory and judicial exceptions to this prohibition, they are few and circumscribed. See RYO Mach., LLC v. U.S. Dep’t of Treasury , 696 F.3d 467, 470 (6th Cir. 2012) ("With few exceptions, no court has jurisdiction over a suit to preemptively challenge a tax."). Thus, "whether an injunction can legally issue under the AIA" requires only two inquiries. Id. at 471.

"First, we must consider whether the ... complaint[ ] [is] within the purview of the AIA as a ‘suit for the purpose of restraining the assessment or collection of any tax.’ " Id. (quoting 26 U.S.C. § 7421(a) ). Second, "[i]f so, we must [consider] whether [the] case falls into an exception to the AIA that would [nevertheless] allow us to [reach] the merits."⁴ Id.

The problem with these ostensibly straightforward inquiries is that "courts lack an overarching theory of the AIA’s meaning and scope against which to evaluate individual [complaints]." Kristin E. Hickman & Gerald Kerska, Restoring the Lost Anti-Injunction Act , 103 Va. L. Rev. 1683, 1686 (2017). At times, the Supreme Court has given the AIA "literal force," without regard to the character of the tax, the characterization of the preemptive challenge to it, or other non-textual factors. Bob Jones Univ. v. Simon , 416 U.S. 725, 742, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974). At other times, it has given the AIA "almost literal" force, considering such factors with an eye towards furthering the AIA’s underlying purposes. Id. at 737, 742, 94 S.Ct. 2038. The result, according to some commentators, has been "jurisprudential chaos." Hickman & Kerska, supra , at 1686.

We attempt to find some order amidst the chaos, addressing each of the AIA inquiries in turn.

1. Whether Plaintiff’s complaint is within the purview of the AIA

Whether a complaint is within the purview of the AIA depends, commonsensically, on whether it is properly characterized as a "suit for the purpose of restraining the assessment or collection of any tax." RYO , 696 F.3d at 471 (quoting 26 U.S.C. § 7421(a) ). Plaintiff argues that its complaint is not a suit for the purpose of restraining the assessment or collection of taxes. Defendants argue that it is. Reducing the briefs to their cores, Plaintiff asserts that the Supreme Court’s recent decision in Direct Marketing Ass’n v. Brohl , 575 U.S. ––––, 135 S. Ct. 1124, 191 L.Ed.2d 97 (2015) controls this issue, while Defendants assert that the D.C. Circuit’s subsequent decision in Florida Bankers Ass’n v. U.S. Dep’t of the Treasury , 799 F.3d 1065 (D.C. Cir. 2015), distinguishing Direct Marketing , is more persuasive. We agree with Defendants and hold that Plaintiff’s complaint is within the purview of the AIA.

In Direct Marketing , the Supreme Court analyzed the scope of the Tax Injunction Act ("TIA"), which provides that no federal district court shall "enjoin, suspend, or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the court of such State." 28 U.S.C. § 1341. Although the TIA concerns state as opposed to federal taxes, it was "modeled on" the AIA and the Supreme Court has long looked to one in construing the other. Direct Marketing , 135 S. Ct. at 1129 ; see also Enochs v. Williams Packing & Nav. Co. , 370 U.S. 1, 6, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962) ("The enactment of the comparable [TIA] ... throws light on the proper construction to be given [to the AIA]."). The Court began its opinion in Direct Marketing by reaffirming this close connection between the two Acts, and making clear that "[it] assume[s] that words used in both Acts are generally used in the same way." 135 S. Ct. at 1129.

At issue in Direct Marketing were the meanings of "restrain," "assessment," "levy," and "collection," all words, apart from "levy," used in both the TIA and the AIA. See 28 U.S.C. § 1341 ; 26 U.S.C. § 7421(a).

With regard to "restrain," the Court explained that "standing alone [it] can have several meanings." Direct Marketing , 135 S. Ct. at 1132. One is a "broad meaning" that "captures orders that merely inhibit acts of assessment, levy and collection." Id ."Another, narrower meaning, however, is ‘to prohibit from action; to put compulsion upon ... [or] to enjoin,’ " and this meaning "captures only those orders that stop (or perhaps compel) acts of assessment, levy and collection." Id. (quotation omitted). The Court held that the TIA uses "restrain" in the latter, narrower sense. Id. And in doing so, it relied on two contextual clues: the words preceding "restrain" in the TIA—"enjoin" and "su...