Since the Supreme Court of the United States’ decision in CIC Servs., LLC v. IRS was issued in May 2021, courts have grappled with how to apply the Anti-Injunction Act (AIA) in other contexts. The US Court of Appeals for the Eleventh Circuit recently affirmed the dismissal of a lawsuit under the AIA in Hancock County Land Acquisitions, LLC v. United States, while the Court of Appeals for the First Circuit recently held that the AIA does not prevent a challenge to the Internal Revenue Service’s (IRS) use of John Doe summons in Harper v. Rettig.
In July, we posted about a circuit split between the Sixth and Eleventh Circuits over claimed Administrative Procedure Act (APA) violations. As discussed below, these post-CIC Services decisions are shaping the boundaries of challenges based upon the APA and the AIA.
THE ELEVENTH CIRCUIT
The taxpayer in this case reported a $180 million deduction for a conservation easement on land it owned in Mississippi. The IRS audited the taxpayer and requested an extension of the statute of limitations on assessment in Internal Revenue Code (IRC) Section 6501. The taxpayer initially declined, but 11 months after the request it agreed to extend the limitations period. At that point, the IRS had almost finished with its examination, and the parties never executed the extension. The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA), and the taxpayer was unable to pursue an administrative resolution with the IRS Office of Independent Appeals (IRS Appeals). The taxpayer filed suit in US federal district court, arguing, among other things, that the IRS violated the APA when it did not send the case to IRS Appeals, resulting in the taxpayer being deprived of pre-litigation administrative resolution of its tax dispute. The IRS moved to dismiss the complaint for lack of subject matter jurisdiction, which the district court granted.
On appeal, the taxpayer argued that the suit was not barred by the AIA, citing CIC Services. The Eleventh Circuit, however, explained that the three considerations that led to that conclusion in CIC Services were the “same three considerations [that] lead to the opposite conclusion here.” The Court found that the taxpayer: (1) would not be subject to any costs separate and apart from the tax penalty from the FPAA; (2) was on the cusp of liability when it filed its suit and (3) would not suffer any criminal punishment by following the AIA’s “familiar pay-now-sue-later procedure.” The Court stated, “at its heart, this suit is a ‘dispute over taxes,’” and it was far from clear that under no circumstances could the IRS prevail on the merits of the taxpayer’s claim.
THE FIRST CIRCUIT
In 2013, the taxpayer in this case opened an account with a digital currency exchange. He deposited bitcoin into his account in 2013 and 2014. In 2015, he started to liquidate his Bitcoin holdings, which lasted until 2016 when his holdings were depleted. At that point, the taxpayer and his spouse held Bitcoin on two other digital currency exchanges. The taxpayer declared and paid taxes on the capital gains of his Bitcoin holdings in the tax years 2016 through 2019.
In 2016, the IRS filed an ex parte “John Doe” administrative summons on the first digital currency exchange, which the exchange opposed. The IRS narrowed the scope of the summons, which the exchange opposed again. After a hearing, the district court permitted the government to enforce the summons with respect to three of the six requests in the summons.
In 2019, the IRS notified the taxpayer that it possessed information about his virtual currency accounts and that it believed he may not have properly reported his virtual currency transactions. Further, the IRS warned the taxpayer that he could face civil or criminal enforcement action for reporting the transactions inaccurately. The taxpayer filed suit on multiple grounds, alleging that the third-party summons violated his rights by unlawfully obtaining his financial information from digital currency exchanges.
The district court dismissed the taxpayer’s monetary claims for damages (which he did not appeal) and dismissed his claim for declaratory and injunctive relief under the AIA for lack of subject matter jurisdiction. The taxpayer appealed to the First Circuit and argued that his suit was not barred by the AIA because it related to the information gathering function of the IRS rather than the assessment or collection of tax.
The First Circuit agreed with the taxpayer. Relying on CIC Services, the Court reasoned that “‘[t]he suit contests, and seeks relief from, a separate legal’ wrong — the allegedly unlawful acquisition and retention of appellant’s financial records … (and) appellant ‘[s]tands nowhere near the cusp of tax liability.’” The Court remanded the case to the district court to consider whether the taxpayer had stated a claim on which relief could be granted.
Practice Point: These two recent appellate decisions involve facts and circumstances that led to different outcomes. What the cases illustrate is continued litigation over the proper scope and application of the APA and AIA following CIC Services. Courts appear to be drilling down more to the crux of the lawsuits, deciding whether they are about tax liability or some other challenge that is not barred by administrative law. We expect to see this battle continue in the coming years.