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    The Tax Lawyer

    The Tax Lawyer: Summer 2020

    The Morass of the Anti-Injunction Act: A Review of the Cases and Major Issues

    Leslie Book and Marilyn Ames

    Jul 19, 2020

    34 min read

    Administrative Practice Penalties Tax Controversy Tax Jurisprudence

    Summary

    • As Congress gives the Service more tasks to perform beyond its functions of assessing and collecting taxes, courts, practitioners, and academics are struggling to apply the Anti-Injunction Act (AIA) as the Service promulgates procedures in the course of fulfilling these new mandates.
    • The AIA has taken on renewed importance as courts consider challenges to tax regulations and guidance, fueled in part by the increasing importance of administrative law in issues of tax procedure and administration.
    • Given congressional dysfunction and, what appears to us, a limited likelihood of any meaningful legislation addressing the issue (at least in the short term), courts, practitioners, and academics are left struggling with an increasingly complex and confused AIA jurisprudence.
    The Morass of the Anti-Injunction Act: A Review of the Cases and Major Issues
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    Abstract

    As Congress gives the Service more tasks to perform beyond its functions of assessing and collecting taxes, courts, practitioners, and academics are struggling to apply the Anti-Injunction Act (AIA) as the Service promulgates procedures in the course of fulfilling these new mandates. The AIA has its origins in the post-Civil War era when the federal government established new procedures ensuring the assessment and collection of taxes. It may seem odd that an over 150-year old provision is now fueling a growing number of contested and controversial disputes. Yet, the AIA has taken on renewed importance as courts consider challenges to tax regulations and guidance, fueled in part by the increasing importance of administrative law in issues of tax procedure and administration.

    From a normative perspective, we sympathize with legislative proposals providing additional ways to challenge regulations and other Treasury Department and Service guidance. We believe that allowing an opportunity to bring good faith pre-enforcement challenges to regulations and guidance will enhance public confidence in the tax system and improve the quality of the rules in the first instance. Given congressional dysfunction and, what appears to us, a limited likelihood of any meaningful legislation addressing the issue (at least in the short term), courts, practitioners, and academics are left struggling with an increasingly complex and confused AIA jurisprudence. In this Article, we provide a discussion and an analysis of the case law in this area.

    I. Introduction

    As Congress gives the Service more tasks to perform beyond its functions of assessing and collecting taxes, courts, practitioners, and academics are struggling to apply the Anti-Injunction Act (AIA) as the Service promulgates procedures in the course of fulfilling these new mandates. The AIA has its origins in the post-Civil War era when the federal government established new procedures ensuring the assessment and collection of taxes. It may seem odd that an over 150-year old provision is now fueling a growing number of contested and controversial disputes. Yet, the AIA has taken on renewed importance as courts consider challenges to tax regulations and guidance, fueled in part by the increasing importance of administrative law in issues of tax procedure and administration.

    Pre-enforcement review “is the lifeblood of administrative law” and is considered “essential to public confidence in the quality and legitimacy of agency action.” While pre-enforcement review of agency action is the norm for most administrative agencies, tax law enjoys a different standard. As the Supreme Court has noted, “taxes are the life-blood of government.” To help ensure limited avenues to judicial review of Service actions, the AIA prohibits suits for the “purpose of restraining the assessment or collection of any tax.” Nevertheless, the Supreme Court has fashioned limited common law exceptions to this prohibition, mainly when traditional paths afforded no meaningful opportunity for judicial review of Service actions. Congress, too, has chipped away at the AIA’s reach, providing (for example) for pre-assessment judicial review of deficiency proceedings, the opportunity to contest certain collection actions in collection due process proceedings, and a means to seek relief from joint and several liability in innocent spouse proceedings.

    Despite the AIA’s steady erosion, a broad reading of its general rule and a narrow reading of its exceptions means that taxpayers or third parties, especially parties subject to information reporting or recordkeeping requirements, must comply with Service-imposed requirements or bear a heavy cost for failing to comply without first having an opportunity to challenge the requirements. The only navigable path to challenging the Service’s action lies in deficiency proceedings in the Tax Court (if the tax or penalty is subject to deficiency procedures) or in fully paying the tax and pursuing a refund in federal district court or the Court of Federal Claims. In reality, given the heavy costs of noncompliance with regulations or Service guidance, the AIA effectively insulates the Treasury Department and the Service’s rulemaking from judicial review.

    Both scholars and courts are re-examining the AIA to see if the Act’s history provides a foundation to allow pre-enforcement review. This includes competing scholarship interpreting the AIA, judicial opinions narrowly interpreting the AIA (to the surprise of many observers), and academics proposing legislative fixes to provide a definitive path to judicial review of tax regulations and guidance outside of the traditional deficiency proceedings in Tax Court or refund proceedings in federal district court and the Court of Federal Claims.

    From a normative perspective, we sympathize with legislative proposals that provide a limited means to judicially challenge regulations and other Service guidance. We believe allowing an opportunity to bring good faith pre-enforcement challenges to regulations and guidance will enhance public confidence in the tax system and improve the quality of the rules in the first instance. Given congressional dysfunction and, what appears to us, a limited likelihood of any meaningful legislation addressing the issue (at least in the short term), courts, practitioners, and academics are left struggling with an increasingly complex and confused AIA jurisprudence. In this Article, we provide a discussion and analysis of the case law. We hope the discussion is helpful for practitioners, courts, and academics.

    Part II provides a brief background of the relevant legislation. Part III details the statutory provisions of the AIA and the Declaratory Judgment Act (DJA). Part IV discusses judicially created exceptions to applications of the AIA. Part V examines what constitutes “restraining the assessment or collection” of tax. Part VI explores what constitutes a “tax” for purposes of the AIA and DJA.

    II. Background

    Congress, through the AIA, bars suits brought “for the purpose of restraining the assessment or collection of any tax . . . whether or not such person is the person against whom such tax was assessed.” And through the DJA, Congress provides that any court of the United States may make a declaratory judgment “[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes . . . .” Due in part to the age of these statutes, little legislative history exists to provide guidance to the courts charged with interpreting them. Generally, these statutes are intended to protect federal revenue and to prevent taxpayers from filing actions seeking injunctions or declaratory judgments with respect to the assessment or collection of taxes, rather than following the usual routes to challenge the Service’s actions, such as paying the tax and filing a claim for refund. With the expansion of the role of the Service into areas other than the tasks of assessing and collecting tax, the courts, including the Supreme Court, have had difficulty in deciding whether and when the AIA and the DJA prevent a taxpayer from bringing suit to challenge actions of the Service, resulting in a plethora of opinions incapable of harmonization.

    The difficulty of determining the AIA’s scope in a world in which tax administration is much more complex than it was when Congress initially passed the AIA is illustrated by the denial of the plaintiff’s petition for a rehearing en banc in CIC Services, LLC v. Internal Revenue Service. In its opinion on the appeal, the Court of Appeals for the Sixth Circuit held that the plaintiff’s suit challenging a notice that imposed additional reporting requirements on captive insurance companies was barred by the AIA. In denying the request for a rehearing en banc, Judge Clay, who wrote the majority opinion for the panel, framed the issue as being one covered by existing AIA precedent. Judge Clay stated, in denying the petition, that a challenge to the regulatory aspect of a regulatory tax necessarily also is a preemptive challenge to the tax aspect of a regulatory tax and thus barred by the AIA. Judge Sutton concurred in the opinion denying the petition, but did so because he felt the Supreme Court’s opinions on the scope of the AIA are contradictory. Consequently, he concluded that it would be more appropriate for the Supreme Court to resolve the conflict than for the entire Sixth Circuit to weigh in. In a dissent to the denial, Judge Thapar discussed the differing legal understandings on the reach of the AIA and how the approach of the majority in the Sixth Circuit’s opinion was out of step with general principles of fairness. The inability of the judges who denied the en banc petition even to agree on whether the Supreme Court precedent on the AIA is clear or contradictory has made it necessary for the Supreme Court to resolve the matter, and on May 4 the Supreme Court granted the petition for certiorari in the case.

    Commenters and scholars also disagree on the reach of the AIA, as well as whether the AIA’s scope can be resolved by the courts or is more appropriately addressed by Congress. While many of the tax scholars discussing this issue agree that a pre-enforcement forum should be available to complainants challenging certain administrative actions of the Service, they do not always agree on the parameters for such proceedings.

    III. The Statutory Provisions of the Anti-Injunction Act and the Declaratory Judgment Act

    A. Coterminous Interpretation of the Anti-Injunction and Declaratory Judgment Acts

    As previously noted, the Supreme Court has explained that the AIA’s principal purpose is to “protect[] the Government’s ability to collect a consistent stream of revenue, by barring litigation to enjoin or otherwise obstruct the collection of taxes.” Although not specifically aimed at curbing tax-related litigation, the DJA contains an exception for suits involving federal taxes, commonly known as the DJA “tax exception,” to the general grant of jurisdiction that allows federal courts to issue declaratory judgments. Congress added the tax exception to the DJA to prevent the Act from being used as an end-run around the AIA’s prohibitions.

    Although the AIA and the DJA are distinct and separate statutes and contain different language, the lower courts have traditionally read them as coterminous, concluding that the AIA’s restrictions also apply to an action brought under the DJA. The Court of Appeals for the District of Columbia’s decision in Cohen v. United States, in which the court considered a challenge under the APA to the validity of Notice 2006-50, illustrates this point. After the Service issued Notice 2006-50 to prescribe the only procedures by which taxpayers could obtain a refund of a telephone excise tax the courts had determined was illegally collected, taxpayers filed various suits to challenge the procedures. In the appeal of the consolidated cases, the D.C. Circuit, en banc, held that the AIA did not apply in this situation. The court also considered whether it would independently have jurisdiction under the DJA. After analyzing the DJA and considering both its legislative history and the decisions of other courts, the D.C. Circuit concluded the phrase “with respect to Federal taxes” in the DJA should be interpreted in the same manner as the phrase “no suit for the purpose of restraining the assessment or collection of any tax” contained in the AIA. The court stated,

    It is true, the AIA and DJA use different words. But this observation does not beget a certain interpretive result. A baker who receives an order for “six” donuts and another for “half-a-dozen” does not assume the terms are requests for different quantities of donuts. . . . Different verbal formulations can, and sometimes do, mean the same thing.

    Although the Supreme Court has not expressly held that the DJA and the AIA should be interpreted as coterminous, the D.C. Circuit’s opinion in Cohen makes clear that the weight of authority is in favor of such an interpretation. Accordingly, when the AIA bars a suit because it seeks to restrain the assessment or collection of a tax, that suit is likely also precluded under the DJA because it is considered to be with respect to federal taxes.

    B. Statutory Exceptions to the Anti-Injunction Act

    Despite its purpose of protecting the government’s ability to collect revenue, the AIA contains a number of express exceptions to its prohibition against suits to restrain the assessment or collection of tax:

    • Petitions under section 6015(e) to review the Service’s final determination with respect to a request for innocent spouse relief or to consider the request when the Service fails to make a timely determination;
    • Petitions filed from notices of deficiency properly issued under section 6212;
    • Petitions filed with the Tax Court under section 6213;
    • Requests for injunctions made under section 6232(c) on premature assessments of amounts attributable to partnership adjustments when a timely petition was filed after the issuance of a notice of final partnership adjustment;
    • Requests to enjoin a levy or proceeding pursuant to section 6330(e) when the taxpayer made a timely request for a collection due process hearing with respect to the related tax or proposed levy and the hearing or any appeals from the hearing are pending;
    • Requests under section 6331(i) to enjoin the collection of the unpaid portion of a divisible tax while a refund suit with respect to any portion of the divisible tax is pending;
    • Requests to enjoin the collection of the trust fund recovery penalty under section 6672(c) when the responsible person paid the amount necessary to begin a refund suit for the tax periods in question, filed a refund claim, and furnished the necessary bond;
    • Requests to enjoin collection of the tax return preparer penalty under section 6694(c) when the preparer timely paid at least 15% of the penalty and brought suit in district court to determine the preparer’s liability;
    • Requests to prohibit the enforcement of a levy or the sale of property levied upon when a person other than the taxpayer has brought a suit for wrongful levy under section 7426 and the levy or sale would irreparably injure rights in the property superior to the rights of the United States;
    • Suits under section 7429 to review a jeopardy levy or assessment; and
    • Proceedings under section 7436 to determine employment status.

    C. Statutory Exceptions to the Declaratory Judgment Act

    The DJA also contains an express exception permitting a declaratory judgment action to be brought with respect to certain determinations involving federal taxes under section 7428. These determinations relate to the status and classification of various types of tax-exempt organizations and foundations.

    IV. Judicially Created Exceptions to the Application of the Anti-Injunction Act

    Although the AIA generally prohibits taxpayers from suing to restrain the assessment or collection of a tax, courts have encountered difficulty in strictly applying the AIA in all circumstances when, because of the taxpayer’s financial situation, the taxpayer has no ability to pay the tax and sue for a refund. The Supreme Court began formulating a judicial exception to what was then the AIA in Miller v. Standard Nut Margarine Co. The district court found, as a matter of fact, that the collection of an excise tax on a product produced by the taxpayer, Standard Nut, would destroy its business. The Service had previously informed the taxpayer by letter that its product was not subject to the excise tax. In addition, a number of district courts had found the tax inapplicable with respect to similar producers. Relying on these facts, the taxpayer made and sold its product for approximately eighteen months under the impression that it was not subject to the excise tax in question. The Service then changed its position and promulgated a Treasury decision that the product in question was subject to the excise tax and demanded that the taxpayer pay the tax on the product already sold.

    Standard Nut brought suit to restrain the Service from collecting the tax, arguing that the imposition of the tax was illegal. Although the taxpayer’s action clearly fell within the language of the predecessor to the AIA, the Supreme Court held a suit may be brought as a matter of equity to enjoin the collection of an illegal tax under “special and extraordinary facts and circumstances.” Concluding that the excise tax could not legally be assessed against Standard Nut, the Court held that the reasons for an anti-injunction statute were not implicated and that, because of the existence of “special and extraordinary facts and circumstances,” the statute did not apply. Consequently, the district court had properly granted the taxpayer the injunction.

    The Supreme Court further articulated this exception providing jurisdiction to grant an injunction otherwise barred by the AIA in Enochs v. Williams Packing & Navigation Co. In Williams Packing, the taxes at issue were employment taxes, and, as in Standard Nut, the taxpayer argued that it was not liable for the taxes in question and that collection would destroy its business. The district court granted the requested injunction against collection, and the Court of Appeals for the Fifth Circuit affirmed. The Supreme Court granted certiorari to determine whether the case came within the “special and extraordinary facts and circumstances” precedent of Standard Nut. After explaining that the issue of whether the individuals in question were employees had not been conclusively determined, the Court created a two-part test that must be satisfied before the judicial exception to the AIA applies: (1) the taxpayer must be certain to succeed on the merits and (2) the taxpayer must demonstrate that collection of the tax will cause irreparable harm. Because the taxpayer had not established that “under no circumstances could the Government ultimately prevail” based on “the information available to [the government] at the time of [the] suit,” and that “equity jurisdiction otherwise exists,” the Court concluded that the judicial exception did not apply and that an injunction could not be granted. According to the Court, the mere inadequacy of a legal remedy alone was insufficient to overcome the plain prohibition of the AIA.

    Because of the strict nature of the Williams Packing two-part test, very few taxpayers will be able to successfully invoke the judicial exception to the AIA. Nevertheless, it should be noted that the judicial exception articulated by the Supreme Court applies to situations in which the taxpayer has a legal remedy, namely the payment of the tax and a suit for a refund. The Court in Williams Packing expressly stated that the “manifest purpose” of the AIA is “to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund.” Whether the AIA applies to situations in which the aggrieved party has no legal remedy, as when a refund suit is not possible and there is no other avenue for relief, is discussed below.

    V. What Constitutes “Restraining the Assessment or Collection of Tax”?

    The AIA prohibits suits “restraining the assessment or collection of any tax” but fails to define the phrase. Does the prohibition apply only to those actions in which the taxpayer is asking for the government to be enjoined from directly assessing or collecting a tax or does it also apply to those governmental actions in which collection and assessment are only indirectly affected? The courts, including the Supreme Court, have struggled to determine whether the prohibition is so broad as to include any action involving federal tax laws.

    The difficulty in determining the scope of the AIA prohibition has increased as the courts deal with challenges to the promulgation and validity of legislative rules such as regulations, revenue rulings, revenue procedures, and notices issued by the Treasury Department and the Service in the wake of the Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States. In Mayo, the Court concluded that the Treasury Department and the Service are subject to the general principles of administrative law, including the provisions of the APA, in a manner similar to other agencies.

    The need to define what constitutes “restraining the assessment or collection of any tax” is particularly strong when the party challenging the Service’s action cannot pay the tax and file a refund suit, such as when the party is not directly liable for a tax or when the Flora full-payment rule renders the possibility of a refund suit unlikely. To date, the Supreme Court has not provided a definitive ruling that lower courts are able to apply consistently.

    A. When the Plaintiff Has a Legal Remedy to Challenge the Service’s Action

    Initially, the Supreme Court opted for a broad definition of what constitutes the assessment or collection of tax in Bob Jones University v. Simon. In that case, Bob Jones University requested an injunction to enjoin the Service from revoking the University’s tax-exempt status based on the school’s alleged racially discriminatory admissions policies. The University claimed that the revocation would violate its constitutional rights to the free exercise of religion and to due process because donors could no longer claim a charitable contribution deduction for donations to a tax-exempt organization. The University argued that its suit fell outside the scope of the AIA because it was aimed at maintaining the flow of contributions, not to obstruct the flow of revenue to the Treasury Department. In other words, it claimed that its suit was not related to the assessment or collection of tax.

    In holding that the AIA applied in the situation, the Court explained that, because the University had also alleged that the revocation of its tax-exempt status would subject it to substantial income tax liability, the suit did involve the assessment or collection of federal income, as well as employment, taxes from the University. Despite the fact that the University would be required to pay these taxes, it had an adequate legal remedy by paying the taxes and suing for a refund. In addition, the Court concluded that the suit by the University also sought to restrain the collection of taxes from its donors; “[a]lthough in this regard petitioner seeks to lower the taxes of those other than itself, the Act is nonetheless controlling. Thus in any of its implications, this case falls within the literal scope and the purposes of the Act.”

    A companion case, Alexander v. Americans United, Inc., involved a similar issue in which the Service revoked the tax-exempt status of a nonprofit educational organization. As in Bob Jones University, Americans United sought an injunction against the revocation of its tax-exempt status so that donations made to it would still qualify as deductible charitable contributions, arguing that the AIA did not bar its suit. The Supreme Court again rejected the plaintiff’s position that the AIA was inapplicable, holding that, although the organization was not seeking to restrain the assessment and collection of its own taxes, it was seeking to enjoin the assessment or collection of its donors’ taxes. The Court also explained that if the Service claimed the organization was liable for FUTA taxes, it could file a refund suit for those taxes in order to litigate the issue.

    As the dissent in Americans United noted, the Court’s decision created a wide-ranging test in a situation in which the “challenged governmental action is not one intended to produce revenue but, rather, is one to accomplish a broad-based policy objective through the medium of federal taxation . . . .” In the two cases, the Court held that the AIA barred the suits in question unless the aggrieved party could show it met the judicial exception to the AIA enunciated in Williams Packing, which both had failed to do.

    B. When the Plaintiff Does Not Have a Legal Remedy

    Finally, in South Carolina v. Regan, the Court confronted a situation in which it held that the AIA did not bar the suit. In Regan, South Carolina challenged a statutory provision that interest-bearing obligations of a state must be issued in registered, rather than bearer, form for the interest to be exempt from federal income tax. In this situation, South Carolina, as the aggrieved party, had no tax liability that could form the basis for a refund suit. The Court rejected the government’s argument that the AIA barred South Carolina’s suit because the state had not shown it met the Williams Packing test, holding that the AIA was not intended to prohibit a suit in which Congress had not provided the plaintiff with an alternative legal means to challenge the validity of a tax.

    The Court considered whether South Carolina could obtain judicial review of its claim by finding a bondholder to pay the tax and challenge the statute in a refund suit. Implicitly rejecting the dicta in Bob Jones University that a suit affecting the tax liability of a third party also fell within the prohibitions of the AIA, the Court in Regan rejected such an interpretation; “Congress did not intend the Act to apply where an aggrieved party would be required to depend on the mere possibility of persuading a third party to assert his claims.” For the AIA to apply, the Court concluded that the plaintiff must have an alternative remedy to an injunction suit, and when no such remedy exists, the aggrieved party could bring a suit.

    Lower courts have relied on the Court’s decision in Regan to allow aggrieved parties to challenge actions taken by the Service. For example, in Cohen v. United States discussed previously, taxpayers filed suit to challenge whether the refund process contained in Notice 2006-50 was lawful and adequate. The Service issued the Notice to set out the only means by which taxpayers could request the refund of a telephone excise tax, which the courts had previously determined to be illegal. The plaintiffs alleged that the Service failed to follow the APA in issuing the Notice and that the Notice resulted in less than the correct amount being refunded. The plaintiffs contended that, had the Service followed the correct administrative procedures, the public could have raised problems with the procedures in the Notice and suggested other ways of handling the refund issue.

    Reading the AIA literally, the Court of Appeals for the D.C. Circuit, in an en banc opinion, held that the suit did not seek to restrain the assessment or collection of a tax as the excise tax had previously been assessed and collected. Instead, the suit concerned the procedures by which the Service would return the money it had illegally collected. In the court’s view, the suit did not directly affect the disposition of any federal tax. Citing the Supreme Court’s decision in Regan, the court in Cohen held that suits could be brought to challenge tax laws when Congress has not provided an alternative avenue for litigation and that a refund suit would not provide an avenue to challenge the procedures set out in the Notice as each taxpayer would have to litigate the Service’s use of the Notice.

    Numerous plaintiffs have subsequently attempted to rely on Cohen to avoid the bar of the AIA, but most courts, including the D.C. Circuit, have distinguished Cohen on its facts. Although the holding in Cohen may be limited, the D.C. Circuit in Z Street v. Koskinen allowed the plaintiff, a group seeking tax-exempt status, to proceed in its suit against the Service in which it raised allegations of discriminatory delay tactics in considering its application for tax-exempt status under section 501(c)(3).

    While there are not many instances of courts relying on Regan to allow a suit to proceed, a district court in New York v. Mnuchin relied on the decision in Regan to reach the merits of a suit filed by four states challenging the limitations on the deduction of state and local taxes in the 2017 Tax Cuts and Jobs Act (TCJA). Section 164, as amended by the TCJA, limits an individual taxpayer to a total deduction of $10,000 for the combination of state and local property taxes and either state and local income or sales taxes (the SALT cap). As a result, many federal income tax bills rose substantially for taxpayers living in states that collect large amounts of state and local taxes, all of which were previously deductible. Four states filed suit challenging the constitutionality of the SALT cap, alleging, in part, that the SALT cap impinged on their ability to pursue their own preferred tax policies in violation of federalism principles.

    The government raised three objections to the court’s jurisdiction in the suit, one of which was that the AIA barred the suit. The court explained that the plaintiff-states, as the aggrieved parties, had no option to challenge the cap by paying the taxes and then suing. While the taxpayers in these states have incentives to challenge the SALT cap in a refund suit, the states themselves do not have an opportunity to assert their threatened sovereign interests. Because of this lack of a remedy on the part of the states, the court determined that the case fell squarely within the holding of Regan, and the AIA did not prevent the court from proceeding to the merits of the case.

    But the decision in CIC Services, LLC, previously discussed, may illustrate the limited reach of the Regan exception. CIC Services involved a challenge brought under the APA to the Service’s issuance of Notice 2016-66 that required the reporting of micro-captive insurance transactions as “transactions of interest” under section 6011. By designating such transactions as tax shelters constituting a reportable transaction, the Service-imposed reporting requirements and potential penalties on the taxpayers engaging in them, as well as on the advisors aiding them. Although the advisors challenging the reporting rules did not dispute the availability of an alternate remedy by paying the penalty and then suing for a refund, they argued that the remedy was not meaningful because it required a party wishing to challenge the requirements to “break the law” and face the civil penalty. In concluding that the Regan exception to the AIA did not apply, the Sixth Circuit emphasized that violating the rules and seeking a refund is precisely what the “AIA is designed to require.”

    C. Impact of the Tax Injunction Act and Direct Marketing

    The Supreme Court’s failure to clearly define what constitutes a suit restraining the assessment or collection of a tax has led to further uncertainty in light of its decisions interpreting the Tax Injunction Act (TIA). Modeled on the AIA, the TIA provides that “[t]he district courts shall not 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 courts of such State.”

    In 2004, the Supreme Court addressed the application of the TIA in Hibbs v. Winn in which the plaintiffs challenged the constitutionality of an Arizona statute permitting residents to receive state tax credits for contributions to parochial schools. Arizona argued that the TIA prohibited the suit. The Court first concluded that, because the suit was not an attempt by the plaintiffs to restrain the collection of their own tax liabilities, the lower court had jurisdiction to consider the claim notwithstanding the TIA. The Court then concluded that, as a “third-party challenge to tax benefits,” the suit was not a dispute with respect to a tax liability because a decision in the plaintiff’s favor would actually increase the state’s tax revenue. Because the purpose of the TIA is to protect state revenues, a suit contesting that the state was actually owed more revenue would not negatively impact the state’s finances. The Court also rejected the state’s argument that the suit would restrain the assessment and collection of tax, defining “assessment” via the Code to mean the recording of an amount that a taxpayer owes the government and “collection” to mean methods that “produce money or other property directly, rather than indirectly through a more general use of coercive power.”

    In 2015, the Supreme Court decided Direct Marketing Association v. Brohl, a case involving notice and reporting rules imposed by the state of Colorado on out-of-state retailers that sold goods to Colorado residents. Colorado enacted its reporting rules to facilitate collection of its state use tax on sales made by out-of-state internet retailers to Colorado residents. The out-of-state retailers successfully sued in federal district court to enjoin the notice and reporting requirements, but the Court of Appeals for the Tenth Circuit reversed and held that the district court lacked jurisdiction to hear the case under the TIA.

    The Supreme Court reversed the Tenth Circuit, and in so doing, interpreted the phrase “assessment, levy or collection” as not including Colorado’s requirement for out-of-state retailers to provide notices or information relative to the state’s use tax liability. In reaching this conclusion, the Court determined the TIA applies “to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.” The Court held that the terms “assessment, levy, or collection” refer to distinct phases of the taxation process “that do not include informational notices or private reports of information relevant to tax liability.” The Court emphasized that not all laws relating to enforcement implicate the TIA:

    Enforcement of the notice and reporting requirements may improve Colorado’s ability to assess and ultimately collect its sales and use taxes from consumers, but the TIA is not keyed to all activities that may improve a State’s ability to assess and collect taxes. Such a rule would be inconsistent not only with the text of the statute, but also with our rule favoring clear boundaries in the interpretation of jurisdictional statutes.

    Importantly, the Court emphasized that the TIA is modeled after the AIA. Consequently, its interpretation of the TIA raises the question whether the Court supports a more limited reading of the AIA in cases in which taxpayers seek to enjoin Service actions relating to the administration of federal tax laws. If so, the Court’s position in Direct Marketing appears to be at odds with its earlier decisions interpreting the AIA that do not focus on whether the suit involves the specific acts of assessment and collection but on whether assessment or collection is impacted in any way, however remotely.

    Despite the apparent tension between the decision in Direct Marketing and earlier Supreme Court decisions adopting a more expansive view of the reach of the AIA, the Tenth Circuit, in interpreting the AIA in The Green Solution Retail, Inc. v. United States, distinguished cases involving the TIA, including Direct Marketing, from those involving the AIA, suggesting that the TIA developments should have a limited impact on cases considering the reach of the AIA. As part of an audit of The Green Solution, a Colorado-based medical marijuana dispensary, the Service sought to apply section 280E, which prohibits certain business deductions if the taxpayer traffics in “controlled substances” under federal law. The Service made a preliminary finding that The Green Solution trafficked in a controlled substance and sought documents and records from the taxpayer as part of its investigation.

    The Green Solution sued and sought to enjoin the Service from investigating whether it trafficked in a controlled substance, arguing that its suit to enjoin the investigation was a step removed from a “suit to restrain the assessment or collection of any tax.” The Service argued that the AIA barred The Green Solution’s request for injunctive relief and prevented the court from reaching the merits of its claim. The Green Solution relied on Direct Marketing and maintained that the Supreme Court had effectively overruled earlier Tenth Circuit cases, such as Lowrie v. United States, concluding that the word “restrain” should be given an expansive reading given the purpose of the AIA.

    In finding that the AIA barred the suit, the Tenth Circuit emphasized that while the Supreme Court in cases like Direct Marketing had held that the terms in both the TIA and AIA are similar, they are not exactly the same. In particular, the term “restrain” in the AIA stands on its own, but it is accompanied by the terms “enjoin” and “suspend” in the TIA. The Tenth Circuit found the absence of those words in the AIA important:

    Unlike in the TIA, “restrain” in the AIA stands alone. Recall that the AIA states: “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” To the extent it keeps company, it does so with the phrase “for the purpose of restraining the assessment or collection.” Thus, unlike in the TIA, the injunctive relief barred by the AIA need not actually restrain an assessment or collection, it need only have restraint of those functions as its purpose. This language comports with our reasoning in Lowrie, that the AIA applies “not only to the actual assessment and collection of a tax, but is equally applicable to activities leading up to, and culminating in, such assessment and collection.” That is, suits barring “activities leading up to . . . and culminating in” assessment may be barred if they are filed “for the purpose of restraining” an assessment.

    The Tenth Circuit acknowledged that the Supreme Court in Direct Marketing relied on a separate rationale supporting The Green Solution’s argument, i.e., the language in both the AIA and TIA statutes spoke of the impact on technical terms like “assessment” and “collection” of tax rather than on an all-encompassing term such as “taxation.” Yet the Tenth Circuit felt the difference in the language of the two statutes rendered its earlier precedent in Lowrie giving an expansive reading of the term “restrain” for purposes of the AIA still controlling.

    It remains unclear how other courts will treat the impact of Direct Marketing on the AIA, and in particular, how they might alter the meaning of the term “restrain” for purposes of the AIA. In another post-Direct Marketing opinion, the D.C. Circuit in Maze v. Internal Revenue Service declined to decide whether the narrow definition of “restrain” that the Supreme Court adopted in Direct Marketing is appropriate in AIA cases. The taxpayer in Maze claimed the Service should have used a procedure in an offshore disclosure compliance initiative allowing for no payment of civil penalties rather than one requiring the payment of up to eight years of penalties. The D.C. Circuit held that, even under the narrow interpretation of restraint consistent with the Direct Marketing approach, the AIA barred the suit because the remedy sought “would have the effect of restraining—fully stopping—the IRS from collecting accuracy-based penalties for which they are currently liable. We believe this fact alone manifests that the AIA bars their suit.”

    Similarly, in CIC Services, LLC, the Sixth Circuit acknowledged it was “unclear” whether the Direct Marketing definition of “restrain” should be extended to the AIA. But the court concluded that the AIA prohibited the taxpayers’ challenge to the Service’s requirements that the taxpayers and their advisors had to report the use of micro-captive insurance companies as transactions of interest under section 6011 or face a penalty, even under a narrow definition of “restrain.” According to the court, the plaintiff’s suit was of necessity a challenge to the tax aspect of the requirements as well as to the reporting aspects, as the suit would eliminate the penalty that could be imposed on the plaintiff if the plaintiff’s action was successful.

    To similar effect, the D.C. Circuit held in Gulf Coast Maritime Supply, Inc. v. United States that the AIA prohibited an attempt to restore a terminated tobacco permit subject to revocation due to a failure to report a change of ownership. The D.C. Circuit emphasized that the “obvious purpose” of the suit was to restore the tobacco permit, which would have relieved the plaintiffs from federal excise tax liability, thus directly impairing the collection of assessed taxes.

    Nevertheless, in Chamber of Commerce of the United States v. Internal Revenue Service, a district court, relying on Direct Marketing, held that the AIA did not apply to a challenge brought by two industry associations on behalf of their members to challenge a temporary regulation aimed at halting corporations from engaging in inversion transactions. The district court reasoned that the “[a]ssessment and collection of taxes does not include all activities that may improve the government’s ability to assess and collect taxes.”

    VI. What Constitutes a “Tax” for Purposes of the Anti-Injunction and Declaratory Judgment Acts?

    A. A Penalty as a Tax

    In addition to raising arguments relating to the scope of the phrase “restraining the assessment or collection of any tax,” some taxpayers have attempted to avoid the prohibitions of the AIA and DJA by alleging the payment or provision being challenged is not a “tax.” The leading case is National Federation of Independent Business v. Sebelius (NFIB). In this case, the Supreme Court considered whether the AIA barred a challenge to the constitutionality of section 5000A, which Congress added to the Code as part of the Patient Protection and Affordable Care Act (Affordable Care Act) and which requires a “shared responsibility payment” from individuals who fail to maintain health insurance coverage, absent an exemption. Because the government did not assert that the shared responsibility payment was a tax for purposes of the AIA, the Court appointed an amicus to argue that the AIA applied. The Court ultimately concluded the AIA did not bar pre-enforcement review of section 5000A, holding that by labeling the payment as a penalty rather than a tax, Congress placed section 5000A outside the ambit of the AIA and, as Congress created both the AIA and the Affordable Care Act, “[h]ow they relate to each other is up to Congress . . . .”

    Although the Court concluded it had jurisdiction to hear the challenge to section 5000A, it did not directly address what the outcome would have been had it found the payment to be a tax for purposes of the AIA or whether the AIA is a jurisdictional statute whose application the parties cannot waive. The Court further confused the issue by noting that “Congress can, of course, describe something as a penalty but direct that it nonetheless be treated as a tax for purposes of the [AIA].” What initially appeared to be a clear-cut test of what constitutes a tax for purposes of the AIA is actually not.

    B. Effect of the NFIB Decision

    1. The Florida Bankers Case

    The decision in Florida Bankers Association v. United States Department of the Treasury illustrates the lack of a bright-line test for what constitutes a tax for purposes of the AIA after the NFIB decision. In the Florida Bankers case, the Treasury Department promulgated regulations under section 6721 requiring U.S. banks to report interest payments made to nonresident aliens, income that would not be taxable in the U.S., or face a penalty. A group of Florida bankers’ associations sued the Treasury Department, seeking a pre-enforcement ruling that the regulations were arbitrary and capricious under the APA. Although the regulations had not yet taken effect when the suit was filed, the district court allowed the bankers’ challenge to proceed despite arguments by the government that the AIA and DJA barred the suit. On appeal, the D.C. Circuit reversed, finding that because the penalty for noncompliance at issue was a “tax,” the AIA and DJA barred the plaintiffs’ pre-enforcement challenge. The approach of the majority opinion of the circuit court in Florida Bankers as compared to that of the dissenting and lower court opinions suggests the unsettled reach of the AIA following the decision in NFIB and cases such as Direct Marketing.

    In determining that the AIA and DJA did not apply to prevent consideration of the regulations’ validity, the district court in Florida Bankers cited Foodservice & Lodging Institute, Inc. v. Regan, a D.C. Circuit opinion from 1987 that had considered and allowed a pre-enforcement challenge to a regulation related to restaurants reporting of waiter tips. The D.C. Circuit in Foodservice & Lodging had distinguished between regulations that focus on reporting and other rules more directly connected to the determination of a taxpayer or third party’s tax liability. Although the district court’s decision in Florida Bankers preceded the Supreme Court’s decision in Direct Marketing, the district court similarly employed the narrow reading of the terms “assessment” and “collection” that the Supreme Court would subsequently adopt to conclude that the TIA did not bar judicial review of Colorado’s reporting obligations on out-of-state retailers.

    In reversing the district court, the D.C. Circuit relied on the Supreme Court’s decision in NFIB and held that the AIA precluded the bankers’ challenge because the penalties imposed for violating the reporting rules, given their placement in the Code, should be treated as a tax for purposes of the AIA. According to the majority, the Supreme Court in NFIB clearly stated that, if the penalty for violating the individual mandate in the Affordable Care Act had been found in Chapter 68, Subchapter B of the Code, the AIA would have prevented that suit from proceeding as the penalty would have been treated as a tax. Importantly, the penalty at issue in Florida Bankers was that under section 6721(a), which is found in Chapter 68, Subchapter B. In distinguishing its earlier decision in Foodservice & Lodging, the D.C. Circuit in Florida Bankers explained that the court in Foodservice & Lodging had proceeded as if the penalty for failing to report the tip income was not treated as a tax. Notably, Congress amended the penalty for failing to report the tip income following oral argument in Foodservice & Lodging so that it is now found in Chapter 68, Subchapter B (similar to the penalty in Florida Bankers), leaving it somewhat unclear whether the earlier opinion actually considered the Code’s treatment of the penalty as a tax.

    The Florida Bankers dissent adopted much of the reasoning of the district court, although it focused on the trend of cases that arose subsequent to that opinion, such as Direct Marketing, which also narrowly defined the terms “assessment” and “collection.” Moreover, the dissent more directly distinguished between rules directly related to the assessment and collection of taxes and rules involving reporting such as the interest reporting rules in question. In the dissent’s view, because reporting rules imposed by regulations are too far removed from the assessment or collection of federal taxes, suits challenging such rules should not be precluded by the AIA. This was particularly true in this instance as the reporting rules concerned interest paid to nonresident aliens that was not itself subject to U.S. income tax despite the government’s argument that a nexus existed to the assessment and collection of U.S. income taxes as the information reported might increase the likelihood that the U.S. would gain access to other countries’ information about interest earned by U.S. citizens investing abroad.

    The dissent also believed that the earlier decision in Foodservice & Lodging was precedential and bound the D.C. Circuit, stating that although the reasoning in Foodservice & Lodging was “perfunctory,” it assumed the D.C. Circuit was aware of the legislation enacted following the case’s oral argument. As noted above, subsequent legislation treated the penalty for tip-reporting noncompliance at issue in Foodservice & Lodging in the same manner as noncompliance with the information reporting penalty at issue in Florida Bankers. In addition, the dissent believed that the majority’s attempt to distinguish Direct Marketing on the basis that Florida Bankers involved a tax penalty, while Direct Marketing did not, was not persuasive because the bankers’ challenge was to the regulatory aspect of the tax penalty, rather than to the tax penalty itself.

    2. The Contraceptive Coverage Penalty Cases

    Not all courts have agreed that the appropriate analysis to determine whether the AIA bars a suit involving a penalty should turn on its characterization in the Code. The Courts of Appeals for the Fourth, Seventh, and Tenth Circuits have taken a different view from the D.C. Circuit in Florida Bankers when deciding that the AIA did not bar a challenge to a regulation promulgated by the Department of Health and Human Services requiring employers to provide health insurance coverage for employees, including contraceptives, or face a penalty (sometimes referred to as “the contraceptive mandate”).

    In Korte v. Sebelius, the Court of Appeals for the Seventh Circuit held that the AIA did not bar the suit as the contraceptive mandate was not itself a tax provision although the penalty for noncompliance is found in section 4980H of the Code. But, wishing to cover all issues, the court then considered whether the penalty itself could be considered a tax. Quoting Cohen v. United States, the court said the AIA does not reach “all disputes tangentially related to taxes.” It then considered the primary purpose of the exaction at issue. Explaining that Congress had called the payment a penalty and finding that the significant amount of the penalty to be paid for the failure to comply with the regulation indicated a punitive purpose, the court determined that the exaction imposed was, in fact, a penalty intended to achieve compliance with the regulation and not a tax. Significantly, the court did not address the fact that the penalty is assessed and collected as a tax.

    The Court of Appeals for the Fourth Circuit in Liberty University v. Lew also held that the AIA did not prevent the consideration of a challenge to the payment imposed by section 4980H. Because the court concluded that the payment was more in the nature of a penalty than a tax, the AIA did not apply. Similarly, the Court of Appeals for the Tenth Circuit in Hobby Lobby Stores, Inc. v. Sebelius held that the AIA did not preclude it from considering the constitutionality of the contraceptive mandate. Describing the payment as a tax that was “no more than a penalty for violating regulations related to health care and employer-provided insurance,” the Tenth Circuit held that the AIA did not apply to the plaintiffs’ suit because it did not seek to challenge the Service’s ability to collect a “tax.” Interestingly, neither party in Hobby Lobby argued the AIA was applicable, but the Tenth Circuit analyzed the issue in any event because it felt it impacted the court’s subject-matter jurisdiction. The Supreme Court affirmed the Tenth Circuit’s decision without addressing the AIA issue. The failure to do so may suggest that the Supreme Court does not consider the AIA as a jurisdictional bar, an issue it left unanswered in its NFIB opinion.

    VII. Conclusion

    We anticipate that absent legislative change or a Supreme Court decision in CIC Services, LLC that squarely addresses some of these challenges, the courts, taxpayers, and practitioners will continue to struggle to apply the AIA. Many factors are contributing to increased interest in the AIA, including the growing importance of administrative law to issues of tax procedure and administration, with administrative law norms strongly favoring the pre-enforcement review of agency regulations and guidance. In addition, the Supreme Court’s interpretation of similar language in the TIA in a way that, if applied to the AIA, could allow for a greater number of pre-enforcement challenges raises numerous issues in need of resolution. Whether these factors lead to legislative change or the Supreme Court directly addressing the AIA’s reach in CIC Services, LLC, we believe the case law described above is of great interest to the bar and the academy.

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