Supreme Court Reverses the Sixth Circuit in CIC Services – Viewpoint
Today, the Supreme Court handed down a unanimous opinion in CIC Services. The Court holds that the Anti-Injunction Act does not bar a suit challenging a IRS notice that requires a non-taxpayer to provide information even though the failure to provide the information could result in a penalty. Today, we bring an observation about the case from Professor Bryan Camp who has blogged with us several times before. Professor Camp filed an amicus brief with the Supreme Court in support of the government’s position that the AIA did bar this action. Soon, depending on how grading exams goes, we will publish a counterpoint to Professor Camp’s post by Les. Les joined the tax clinic at Harvard Law School in filing an amicus brief on behalf of the Center for Taxpayer Rights supporting the plaintiff in this case. Here is a copy of the amicus brief filed by Professor Camp and here is a copy of the amicus brief filed by the Center for Taxpayer Rights. We have previously blogged this case many times. A sample of prior posts can be found here (in a post by authors of another amicus brief in support of the government whom we hope might have more to say here in coming days), here and here.
Here’s what it got wrong. Justice Kagan rests her opinion on a distinction between “information gathering” on the one hand and “assessment/collection” on the other hand. The Anti Injunction Act, 26 USC §7421, prohibits suits to restrain the latter, she says, not the former. All CIC Services was doing was seeking to restrain the IRS from collecting information from it.
Here’s why that’s wrong. Assessment is a process, not an event. And the process starts with reporting information to the IRS! Heck, lots of folks are doing that today. The wrinkle in this case is that it was not a taxpayer reporting information to the IRS; it was a third party (CIC Services). So the Court says hey, information reporting by taxpayers may be part of assessment (because the IRS, after all, assesses tax in large part based on the information taxpayers self-report). You see this most explicitly in Justice Sotomayor’s concurrence. But information reporting by third parties, says the Court, is not part of assessment or collection tax.
The heck it isn’t!
Saying that information reporting by third parties is different than information reporting by taxpayers reflects a deep confusion about tax administration. Congress created third-party information reporting requirements in the first place as an integral part of the tax assessment and collection process. When Congress re-started the income tax in 1913 it experimented with what we are now very used to: third party withholding of taxes. That’s what employers now routinely do for employees. But Congress got lots of blow-back for that. So it quickly abandoned the requirement for third parties to withhold actual dollars. Instead, Congress substituted third-party information reporting for withholding. This was in the War Revenue Act of 1917, 40 Stat. 300. The Senate Finance Committee explained that third-party information reporting was a “substitute for the previous collection strategy of tax withholding.” It was “conducive to a more effective administration of the law in that it will enable the Government to locate more effectively all individuals subject to the income tax and to determine more accurately their tax liability. This is of prime importance from a viewpoint of collections.” Sen. Rpt. 65-103 (August 6, 1917) at 20 (emphasis added).
Since 1917 Congress has added dozens and dozens of third-party information reporting requirements to the Tax Code. And always for the same reason: such reporting is integral, is vital, to the proper assessment and collection of tax. When the IRS did its tax gap studies it found that taxpayers are far more likely to properly self-report transactions (and the income from such transactions) when they know a third party is reporting as well. No duh! So that is why a suit attempting to restrain a third-party information reporting requirement is well within the scope of the Anti-Injunction Act’s prohibition against suits to restrain the “assessment or collection” of “any tax” regardless of whether the person suing “is the person against whom such tax was assessed.” That’s the language in §7421.
Here’s what getting it wrong means. As Justice Kavanaugh pointed out, this decision creates a new exception to the Anti Injunction Act. It will require litigation for courts to figure out just how big or small that exception is. For example, when Justice Kavanaugh was on the D.C. Circuit he authored an opinion in Florida Bankers Association holding for the IRS on a very, very, very similar issue. This CIC Services opinion nukes Florida Bankers. …or DOES it?? Hello litigation!
The bigger picture here is the Court is revisiting what it thinks should be the proper relationship of courts and the IRS. This decision allows courts to give greater and closer supervision of how the IRS administers the tax system. It has the potential to greatly slow down the IRS’s ability to detect tax cheats, such as the micro-captive insurance arrangements that CIC was promoting. That will lead to significant losses in tax revenue while companies like CIC will continue to be able to create and promote new ways for wealthy taxpayers to avoid paying taxes.
But there are two silver linings. First, the decision might spur Congress to actually revise the Anti-Injunction Act to bring it into the 21st Century. Congress wrote the AIA in 1867, after all and the basic operative language is unchanged. For example, there was no third party reporting in 1867 the way there is now. Second, even without the AIA, this ruling does not mean that courts will suddenly stop all third-party information reporting. A court will not enjoin the IRS from enforcing a contested reporting requirement unless the party seeking the injunction can meet the traditional requirements to obtain an injunction: (1) the party is likely to win on the merits; and (2) the party will suffer irreparable harm if the court does not enjoin.