May 17, 2021

Supreme Court Decides CIC Services, LLC v. Internal Revenue Service

On May 17, 2021, the U.S. Supreme Court decided CIC Services, LLC v. Internal Revenue Service, holding that a suit to enjoin Internal Revenue Service (IRS) Notice 2016-66 does not trigger the Anti-Injunction Act even though a violation of the Notice may result in a tax penalty.

The Anti-Injunction Act, 26 U.S.C. § 7421(a) (the “Act”), bars any “suit for the purpose of restraining the assessment or collection of any tax.” Because of the Act, a person can typically challenge a federal tax only after he pays it, by suing for a refund. IRS Notice 2016-66 (the “Notice”) requires taxpayers and “material advisors” like petitioner CIC Services, LLC (“CIC”) to report to the IRS information about certain insurance agreements. The potential consequences for noncompliance include both civil tax penalties and criminal prosecution. Accordingly, the thing that raises an Anti-Injunction Act question — the tax — comes into play only at the back-end of a complex information-reporting scheme.

CIC brought suit challenging the lawfulness of the Notice under the Administrative Procedure Act before the Notice’s first reporting date. As a result, it never made (or failed to make) a report under the Notice and was never assessed a penalty. The Government nevertheless moved to dismiss the action based on the Act, arguing that CIC’s “requested relief would prevent the IRS from assessing a tax penalty against” entities that disregard the Notice’s reporting requirements. In the Government’s view, the way for CIC to bring its claims was to disobey the Notice and then sue for a refund of any resulting tax penalty. The District Court agreed and dismissed. The Court of Appeals for the Sixth Circuit affirmed, reasoning that CIC’s suit would “restrain (indeed eliminate)” the tax penalty by “invalidat[ing] the Notice, which is [the tax’s] entire basis.”

The Supreme Court reversed, holding that the Act does not preclude a suit seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal sanctions. The Court reasoned that a reporting requirement is not a tax, and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection. That is so even if the reporting rule will help the IRS bring in future tax revenue — here, by identifying sham insurance transactions. The added tax penalty for violation of a demand for information does not change the analysis. In considering a “suit[’s] purpose,” the Supreme Court inquires not into a taxpayer’s subjective motive, but into the action’s objective aim — essentially, the relief the suit requests.

Here, CIC alleged that the Notice was procedurally and substantively flawed and brought no legal claim against the separate statutory tax. Moreover, CIC’s complaint asked for injunctive relief from the Notice’s reporting rules, not from any impending or eventual tax obligation. Thus, the Court concluded, the purpose of CIC’s suit was not to “restrain[ ] the assessment or collection of [a] tax.”

Justice Kagan delivered the opinion for a unanimous Court.

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