Amicus Curiae Brief — CIC Services, LLC, Petitioner v. Internal Revenue Service, et al.

No. 19-930

IN THE

Supreme Court of the United States

CIC SERVICES, LLC,

Petitioner,

v.

INTERNAL REVENUE SERVICE; DEPARTMENT OF TREASURY;

UNITED STATES OF AMERICA,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals for the

Sixth Circuit

BRIEF OF NATIONAL FEDERATION OF

INDEPENDENT BUSINESS SMALL BUSINESS

LEGAL CENTER, GLOBAL BUSINESS ALLIANCE,

SILICON VALLEY TAX DIRECTORS GROUP,

INFORMATION TECHNOLOGY INDUSTRY

COUNCIL, NATIONAL FOREIGN TRADE

COUNCIL, THE CATO INSTITUTE, AND REASON

FOUNDATION AS AMICI CURIAE IN SUPPORT OF

THE PETITIONER

JOSEPH B. JUDKINS

ELAINE WILKINS

Counsel of Record

BAKER & MCKENZIE LLP

A. DUANE WEBBER

815 Connecticut Ave NW

GEORGE M. CLARKE

Washington, DC 20006

DANIEL A. ROSEN

(202) 452-7000

JOSHUA ODINTZ

joseph.judkins@

PHILLIP J. TAYLOR

bakermckenzie.com

Counsel for Amici Curiae

LEGAL PRINTERS LLC ! Washington, DC ! 202-747-2400 ! legalprinters.com

i

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................. ii

INTEREST OF AMICI CURIAE ......................... 1

SUMMARY OF ARGUMENT ............................... 3

ARGUMENT ........................................................... 5

I.

THE AIA’S ENUMERATED EXCEPTIONS

SHOW THAT CONGRESS HAS ALWAYS

FOCUSED

ON

LITIGATION

THAT

RESTRAINS

ASSESSMENT

AND

COLLECTION

ACTION,

NOT

ON

LITIGATION THAT MIGHT GENERALLY

AFFECT TAXATION. ........................................ 5

II.

A STRAIGHTFORWARD APPLICATION OF

THE PLAIN TERMS OF THE AIA CAN BE

HARMONIZED WITH THE APA’S STRONG

PRESUMPTION OF JUDICIAL REVIEW. .......... 14

III.

AN OVERBROAD APPLICATION OF THE

AIA PERPETUATES TREASURY’S LACK OF

ACCOUNTABILITY

AND

FOSTERS

UNCERTAINTY

AMONG

REGULATED

PARTIES. ........................................................ 23

CONCLUSION ....................................................... 31

ii

TABLE OF AUTHORITIES

Page(s)

CASES

Abbott Labs. v. Gardner,

387 U.S. 136 (1967)................................ 17, 19, 21

Bowen v. Michigan Academy of Family

Physicians,

476 U.S. 667 (1986)............................................ 17

Chevron U.S.A., Inc. v. Natural Resources

Def. Council, Inc.,

467 U.S. 837 (1984)............................................ 30

Chrysler Corp. v. Brown,

441 U.S. 281 (1979)............................................ 16

CIC Servs., LLC v. IRS,

925 F.3d 247 (6th Cir. 2019) ............................. 18

CIC Servs., LLC v. IRS,

936 F.3d 501 (6th Cir. 2019) ............................... 4

City of Arlington, Tex. v. FCC,

569 U.S. 290 (2013)............................................ 15

Cohen v. United States,

650 F.3d 717 (D.C. Cir. 2011) ...................... 17, 29

Conn. Light & Power Co. v. Nuclear

Regulatory Comm’n,

673 F.2d 525 (D.C. Cir. 1982) ............................ 16

iii

TABLE OF AUTHORITIES

(continued)

Page(s)

Cutting v. Gilbert,

6 F. Cas. 1079 (C.C.S.D.N.Y. 1865)................... 14

Direct Marketing Association v. Brohl,

575 U.S. 1 (2015).................................................. 5

Dominion Res., Inc. v. United States,

681 F.3d 1313 (Fed. Cir. 2012) .......................... 24

EC Term of Years Trust v. United States,

550 U.S. 429 (2007)............................................ 13

Enochs v. Williams Packing & Navigation

Co.,

370 U.S. 1 (1962).......................................... 19, 20

Fla. Bankers Ass’n v. U.S. Dep’t of the

Treasury,

799 F.3d 1065 (D.C. Cir. 2015) .......................... 18

Flora v. United States,

362 U.S. 145 (1960)...................................... 11, 12

Franklin v. Mass.,

505 U.S. 788 (1992)............................................ 16

Hibbs v. Winn,

542 U.S. 88 (2004)................................................ 6

Jifry v. FAA,

370 F.3d 1174 (D.C. Cir. 2004) .......................... 28

iv

TABLE OF AUTHORITIES

(continued)

Page(s)

Judulang v. Holder,

565 U.S. 42 (2011).............................................. 17

Laing v. United States,

423 U.S. 161 (1976).............................................. 9

Lewis v Reynolds,

284 U.S. 281 (1932)............................................ 24

Mayo Found. for Med. Educ. & Research v.

United States,

562 U.S. 44 (2011)................................................ 3

Perez v. Mortgage Bankers Association,

575 U.S. 92 (2015).............................................. 28

Publ. Citizen v. Nuclear Regulatory Comm’n,

901 F.2d 147 (D.C. Cir. 1990) ............................ 28

Reno v. American-Arab Anti-Discrimination

Commission,

525 U.S. 471 (1999)...................................... 21, 22

Rusk v. Cort,

369 U.S. 367 (1962)............................................ 17

Shaughnessy v. Pedreiro,

349 U. S. 48 (1955)............................................. 21

Steele v. United States,

280 F.2d 89 (8th Cir. 1960) ............................... 12

v

TABLE OF AUTHORITIES

(continued)

Page(s)

Thor Power Tool Co. v. Commissioner,

439 U.S. 522 (1979).............................................. 4

Wis. Cent. Ltd. v. United States,

138 S.Ct. 2067 (2018)......................................... 25

STATUTES

5 U.S.C. § 553 ........................................................ 16

5 U.S.C. §§ 701-706 ................................................. 3

5 U.S.C. § 701(a)(1) ......................................... 17, 21

5 U.S.C. § 701(a)(2) ............................................... 21

5 U.S.C. § 706(2)(A), (C), (D) ................................. 15

8 U.S.C. § 1252(g) .................................................. 22

26 U.S.C. § 245A.................................................... 29

26 U.S.C. § 965(b)(4)(A) ........................................ 29

26 U.S.C. § 3121(c) .................................................. 8

26 U.S.C. § 3402 ................................................ 8, 12

26 U.S.C. § 6013(d) ................................................ 13

26 U.S.C. § 6015 .................................................... 13

26 U.S.C. § 6015(e) ............................................ 6, 13

vi

TABLE OF AUTHORITIES

(continued)

Page(s)

26 U.S.C. § 6201(a) .................................................. 6

26 U.S.C. § 6203 .................................................. 5, 6

26 U.S.C. § 6211 ................................................ 7, 11

26 U.S.C. § 6212 .................................................... 24

26 U.S.C. § 6212(a) .......................................... 6, 7, 8

26 U.S.C. § 6212(c) .......................................... 6, 7, 8

26 U.S.C. § 6213(a) .......................................... 6, 7, 8

26 U.S.C. § 6225(b)(1) ........................................... 10

26 U.S.C. § 6232(c) ............................................ 6, 10

26 U.S.C. § 6234(b)(1) ........................................... 10

26 U.S.C. § 6302 ...................................................... 5

26 U.S.C. § 6330(a)(3)(B) and (c)(2) ...................... 11

26 U.S.C. § 6330(e)(1)........................................ 6, 11

26 U.S.C. § 6331(i)............................................. 6, 12

26 U.S.C. § 6511(a) ................................................ 25

26 U.S.C. § 6662(b)(1) ........................................... 27

26 U.S.C. § 6672 .................................................... 11

vii

TABLE OF AUTHORITIES

(continued)

Page(s)

26 U.S.C. § 6672(a) ................................................ 12

26 U.S.C. § 6672(c) ............................................ 6, 12

26 U.S.C. § 6694(a) and (b) ................................... 13

26 U.S.C. § 6694(c) ............................................ 6, 13

26 U.S.C. § 7421(a) .......................................... 2, 5, 6

26 U.S.C. § 7422 ................................................ 7, 24

26 U.S.C. § 7426(a) ...................................... 6, 12, 13

26 U.S.C. § 7426(b)(1) ................................. 6, 12, 13

26 U.S.C. § 7429(b) .............................................. 6, 9

26 U.S.C. § 7436 .................................................. 6, 9

26 U.S.C. § 7436(d)(1) ............................................. 9

26 U.S.C. § 7805(b)(1) ........................................... 26

26 U.S.C. § 7805(b)(4) ........................................... 26

26 U.S.C. Subtitle C, chs. 21-25.............................. 8

26 U.S.C. Subtitle F, ch. 64................................... 11

28 U.S.C. § 1341 ...................................................... 5

viii

TABLE OF AUTHORITIES

(continued)

Page(s)

Pub. L. No. 68-176, ch. 234, §§ 274, 308, 900,

43 Stat. 253 .......................................................... 7

Pub. L. No. 69-20, ch. 27, §§ 274(b), 308(a),

44 Stat. 9 .............................................................. 8

Pub. L. No. 89-719, § 110, 80 Stat. 1125 .............. 12

Pub. L. No. 94-455, § 1204(c)(11), 90 Stat.

1520 ...................................................................... 9

Pub. L. No. 95-628, § 9(b)(1), 92 Stat. 3627 ......... 13

Pub. L. No. 105-34, § 1454, 111 Stat. 788,

1055-56 ................................................................. 9

Pub. L. No. 105-206, § 3201(a), 112 Stat. 685 ...... 13

Pub. L. No. 114-74, § 1101(c)(1), 129 Stat.

584 ...................................................................... 10

Pub. L. No. 115-97, 94 Stat. 2390 (2017).............. 29

Tax Reform Act of 1976 § 1203(b)(1) .................... 13

REGULATIONS

26 C.F.R. § 1.78-1(c) .............................................. 29

26 C.F.R. § 1.965-5(c)(1)(ii) ................................... 29

26 C.F.R. § 1.6662-3(b)(2) ..................................... 27

ix

TABLE OF AUTHORITIES

(continued)

Page(s)

84 Fed. Reg. 28,398 ............................................... 28

OTHER AUTHORITIES

Am. Bar Ass’n, Tax Section Court Procedure

Comm., IRS Office of Chief Counsel FY

2018 & FY2019 2d Quarter presentation ... 20, 21

H.R. Rep. No. 79-1980 (1946) ............................... 17

Internal Revenue Manual 32.1.5.4.7.4.1(3)

(Aug. 21, 2018) ................................................... 27

Internal Revenue Manual 32.1.5.4.7.4.1(9)

(Aug. 21, 2018). .................................................. 28

Jaffe, Judicial Control of Admin. Action

(1965).................................................................. 19

Kafka & Cavanagh, Litig. of Fed. Civil Tax

Controversies (Thomson Reuters/Tax &

Acct. June 2020)............................................. 7, 11

Kristin E. Hickman & Gerald Kerska,

Restoring the Lost Anti-Injunction Act, 103

Va. L. Rev. 1683 (2017) ....................................... 8

Kristin Hickman, Coloring Outside the

Lines: Examining Treasury’s (Lack of)

Compliance with Administrative

Procedure Act Rulemaking Requirements,

82 Notre Dame L. Rev. 1727 (2007) .................. 27

x

TABLE OF AUTHORITIES

(continued)

Page(s)

Martin Jacob et al., Real Effects of Tax

Uncertainty: Evidence from Firm Capital

Investments (2019) ............................................. 26

NFIB Research Found., Regulations, Nat’l

Small Bus. Poll (2017) ....................................... 25

PricewaterhouseCoopers, Paying Taxes: The

Compliance Burden .......................................... 24

Roger Foster & Everett V. Abbott, A Treatise

on the Federal Income Tax Under the Act

of 1894 (1895) ..................................................... 14

Saltzman & Book, IRS Practice and

Procedure (Thomson Reuters/Tax & Acct.

rev. 2d ed. 2002 & supp. 2020-1) ......................... 7

Staff of Joint Comm. on Taxation, 94th

Cong., General Explanation of the Tax

Reform Act of 1976 (Comm. Print 1976) ............. 9

Staff of Joint Comm. on Taxation,

Complexity in the Federal Tax System

(JCX-49-15) (Mar. 6, 2015) ................................ 25

INTEREST OF AMICI CURIAE1

Amici

are

trade

associations,

industrymembership organizations, and think tanks.

1. The National Federation of Independent Business

Small Business Legal Center is a nonprofit, publicinterest law firm established to support small

businesses in the nation’s courts through

representation on issues of public interest affecting

small businesses. The National Federation of

Independent Business (“NFIB”) is an organization

that represents the interests and concerns of

America’s small business owners and comprises

approximately 300,000 member businesses.

2. The Global Business Alliance represents more

than 200 major international companies with

significant U.S. operations and actively promotes and

defends an open economy that welcomes international

companies to invest in America.

3. The Silicon Valley Tax Directors Group, composed

of 105 company members, promotes sound, long-term

1 Both parties have consented to the filing of this brief by amici

curae. Pursuant to this Court’s Rule 37.6, amici state that this

brief was not authored in whole or in part by counsel for any

party, and that no person or entity other than amici, their

members, or their counsel made a monetary contribution

intended to fund the preparation or submission of this brief. All

parties have been timely notified of the submission of this Brief.

2

tax policies that support the global competitiveness of

the U.S. high-technology industry.

4. The Information Technology Industry Council

represents the interests of the information and

communications technology industry, including

member companies that are among the global leaders

in innovation.

5. The National Foreign Trade Council, founded in

1914, represents more than 200 U.S. company

members and promotes a rules-based world economy,

including clear and fair tax laws.

6. The Cato Institute is a nonpartisan public policy

research foundation dedicated to advancing the

principles of individual liberty, free markets, and

limited government.

7. Reason Foundation is a nonpartisan and nonprofit

organization, founded in 1978 to promote libertarian

principles and policies, including free markets,

individual liberty, and the rule of law.

Amici’s members include taxpayers across the

business community who are impacted by tax rules on

a daily basis. Their diversity reflects the significance

of the fundamental issue here—the right to know the

tax law with certainty when tax rules are issued.

Applying the Anti-Injunction Act (“AIA”), section

7421(a),2 to preclude pre-enforcement challenges to

Unless otherwise noted, all “Code,” “section,” and “I.R.C.”

references are to the United States Internal Revenue Code of

1986, as amended (26 U.S.C.), and all “Treas. Reg. §” references

are to the Treasury Regulations promulgated thereunder (26

C.F.R.).

2

3

tax rules perpetuates uncertainty about regulations

of dubious validity. Amici are interested in a level

playing field that does not “carve out an approach to

administrative review good for tax law only.” Mayo

Found. for Med. Educ. & Research v. United States,

562 U.S. 44, 55 (2011). To that end, Amici respectfully

request that this Court clarify that the AIA’s scope is

limited to its terms and that it does not prohibit preenforcement judicial review of tax rules.

SUMMARY OF ARGUMENT

Congress has consistently limited the AIA to apply

only to IRS “assessment” and “collection” actions.

Those steps in the taxation process occur well after

Treasury and the IRS3 engage in rulemaking or

otherwise issue guidance with the force and effect of

law (collectively, “rulemaking”). On its face, the AIA

does not apply to block pre-enforcement suits under

the Administrative Procedure Act (“APA”), 5 U.S.C.

§§ 701-706, that seek to challenge the validity of a

rulemaking.

In this case, the Court faces the question of how to

balance the strictures of the AIA, on the one hand,

with the Congressional mandate for thorough review

of agency action, on the other. Though often

overlooked, the thirteen enumerated exceptions in the

first phrase of the AIA are useful guideposts in this

analysis. Those exceptions support the conclusion

that the AIA is now, and has always been, narrowly

focused on suits that restrain assessment or

collection. With the context provided by these

exceptions, the AIA looks less like a statute that pre3 Treasury and the IRS are hereinafter collectively referred to as

“Treasury.”

4

empts all suits affecting taxation and more like one

that can exist comfortably alongside the APA and

challenges to the validity of agency rulemaking. This

is because each of the AIA’s explicit exceptions

considers a situation in which the IRS has targeted a

particular taxpayer and taken specific action to assess

or collect tax from that taxpayer. These exceptions

collectively indicate that Congress did not intend to

apply the AIA to other, earlier, steps in the taxation

process, such as those seeking clarity on the law

before any specific enforcement action.

An overbroad application of the AIA thus

contradicts plain statutory language and rests on

suspect policy grounds. Worse yet, it shields all

Treasury regulations from pre-enforcement judicial

review under the APA—even though assessment or

collection against a specific taxpayer is not at issue in

a garden-variety APA suit. The instant case

illustrates some of the harms that follow from that

lack of pre-enforcement review. The court below

applied the AIA too broadly, leaving taxpayers to

“report to prison first [and to] challenge later.” CIC

Servs., LLC v. IRS, 936 F.3d 501, 504 (6th Cir. 2019)

(Sutton, J. concurring in the denial of rehearing en

banc). A straightforward construction of the AIA

highlights its proper scope and application. It also

harmonizes with the APA’s strong presumption of

judicial review. And it facilitates much-needed

certainty in the tax law—an area that “can give no

quarter to uncertainty.” Thor Power Tool Co. v.

Commissioner, 439 U.S. 522, 543 (1979).

Based on the foregoing, this Court should reject an

overbroad application of the AIA and clarify that the

5

AIA does not prohibit pre-enforcement suits that

challenge the validity of tax rules under the APA.

ARGUMENT

I. THE AIA’S ENUMERATED EXCEPTIONS SHOW

THAT CONGRESS HAS ALWAYS FOCUSED ON

LITIGATION THAT RESTRAINS ASSESSMENT AND

COLLECTION ACTION, NOT ON LITIGATION THAT

MIGHT GENERALLY AFFECT TAXATION.

The AIA prohibits suits “for the purpose of

restraining the assessment or collection of any tax.”

I.R.C. § 7421(a). In Direct Marketing Association v.

Brohl, 575 U.S. 1 (2015), this Court determined the

meaning of “restrain” in the Tax Injunction Act, 28

U.S.C. § 1341, which was modeled on and used the

same operative terms as the AIA. “Restrain” means to

“stop,” and “a suit cannot be understood to ‘restrain’

the ‘assessment, levy or collection’ of a state tax if it

merely inhibits those activities.” Id. at 14. Given their

shared lineage, the same must hold true for the AIA.

As in the TIA, the word “restraining” in the AIA

acts on “a carefully selected list of technical terms . . .

not on an all-encompassing term, like ‘taxation.’” Id.

at 13. In particular, “restraining” acts on

“assessment” and “collection.” “Assessment” is “the

official recording of a taxpayer’s liability,” and

“collection” is “the act of obtaining payment of taxes

due.” Id. at 9-10; I.R.C. § 6203 (“The assessment shall

be made by recording the liability of the taxpayer in

the office of the Secretary . . . .”)4; I.R.C. § 6302

(describing the mode of tax collection).

4 Although a taxpayer may colloquially be said to “self-assess”

tax liability by filing a return, the Code clarifies that the IRS,

6

However, the various steps in the taxation process

require, as a prerequisite, clarity in the agency’s tax

laws—that

body

of regulatory

and other

administrative precedent that governs taxpayers’

relationship with our Government. This Court faces

the question of whether and to what extent the AIA

precludes judicial review of APA challenges. Because

the AIA applies only to “assessment” or “collection”

action, a pre-enforcement challenge to agency

rulemaking

brought

independently

of

any

enforcement action should not trigger the AIA’s

prohibitions.

The initial phrase of the AIA supports this

conclusion.

That

phrase

contains

thirteen

enumerated exceptions—“sections 6015(e), 6212(a)

and (c), 6213(a), 6232(c), 6330(e)(1), 6331(i), 6672(c),

6694(c), 7426(a) and (b)(1), 7429(b), and 7436”— that

preclude the IRS from asserting the AIA in an array

of situations. I.R.C. § 7421(a). As with all exceptions,

each sheds additional light on the rule it excepts. See

Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997)

(“broader context of the statute as a whole” clarifies

statutory meaning). Collectively, these exceptions

show that Congress has targeted the AIA at suits by

particular taxpayers to enjoin ongoing assessment or

collection action, not on litigation far removed from,

and predicate to, those actions. The AIA’s exceptions

also show that the traditional rationale for a broad

application of the AIA—i.e., to ensure the flow of tax

not the taxpayer, makes the actual, technical assessment. I.R.C.

§ 6203; Hibbs v. Winn, 542 U.S. 88, 100 n.3 (2004) (“The word

‘self-assessment,’ however, is not a technical term; as IRC §

6201(a) indicates, the IRS executes the formal act of income-tax

assessment.”).

7

dollars to the federal fisc—is mistaken. In fact, most

tax litigation occurs before taxpayers are required to

pay the disputed tax.

A. The Prepayment-Litigation Exceptions. Six

AIA exceptions relate to “prepayment” litigation,

which arises before taxpayers must pay the disputed

tax.

1. Tax Court Litigation. Three exceptions—

6212(a) and (c) and 6213(a)—relate to “deficiency”5

litigation in the Tax Court. Deficiency litigation

occurs on a “prepayment” basis—taxpayers who are

already involved in the assessment phase of the

taxation process have the ability to challenge their

alleged tax liability without paying any amount of

tax.6

These exceptions have been part of the Code for

nearly 100 years. In 1924, Congress created the Board

of Tax Appeals (the Tax Court’s predecessor), which

had jurisdiction to determine whether a particular

taxpayer was liable for tax. Revenue Act of 1924, Pub.

L. No. 68-176, ch. 234, §§ 274, 308, 900, 43 Stat. 253,

297, 308, 336. Two years later, in the predecessor to

current section 6213(a), Congress clarified that the

IRS could not assess or collect tax from the taxpayer

5 In general, a tax “deficiency” results when the full amount of

the correct tax exceeds the amount reported on the return. I.R.C.

§ 6211; Saltzman & Book, IRS Practice and Procedure ¶10.03[1].

6 By contrast, “refund” litigation occurs after a taxpayer has paid

the tax liability, filed a timely claim for refund, and then filed

suit in the appropriate U.S. federal district court or the U.S.

Court of Federal Claims. See I.R.C. § 7422; Kafka & Cavanagh,

Litig. of Fed. Civil Tax Controversies ¶ 1.01 (Thomson

Reuters/Tax & Acct. June 2020).

8

during those proceedings. Revenue Act of 1926, Pub.

L. No. 69-20, ch. 27, §§ 274(b), 308(a), 44 Stat. 9, 55,

75; see Kristin E. Hickman & Gerald Kerska,

Restoring the Lost Anti-Injunction Act, 103 Va. L. Rev.

1683, 1729 (2017). Congress renumbered the

provisions and updated the cross-references in

subsequent iterations of the Code, but the substantive

text and fundamental concepts have remained intact.

Hickman & Kerska, supra, at 1730.

Currently, section 6212(a) authorizes the IRS to

send a notice of deficiency to a particular taxpayer for

an amount of tax allegedly due. That notice serves as

the taxpayer’s “ticket to the Tax Court” to challenge

the alleged tax liability before paying any taxes

allegedly owed. If the taxpayer files a Tax Court

petition, section 6212(c) prohibits the IRS from

determining additional deficiencies except under

specifically enumerated circumstances, including

fraud and math errors.

Section 6213(a) describes the requirements for

filing a petition and precludes the IRS from assessing

tax until the case has become final. That exception to

the AIA allows the Tax Court (or another federal court

with jurisdiction) to enjoin any IRS assessment or

collection action regarding the tax year at issue.

2.

The

Employment-Tax-Litigation

Exception. Another exception relates to employment

taxes, including taxes under the Federal Insurance

Compensation Act (“FICA”) and the Federal

Unemployment Tax Act (“FUTA”), and to wagewithholding requirements. I.R.C. Subtitle C, chs. 2125. Generally, employers must withhold tax from

compensation paid to their employees but not to

independent contractors. I.R.C. §§ 3121(c), 3402. The

9

classification of workers as one or the other

sometimes leads to disputes, so section 7436 allows

taxpayers to sue in the Tax Court to resolve workerclassification issues and thereby determine the

taxpayer’s employment-tax liabilities. Taxpayer

Relief Act of 1997, Pub. L. No. 105-34, § 1454, 111

Stat. 788, 1055-56. Section 7436(d)(1) applies the

same principles of deficiency litigation to workerclassification determinations. Thus, the IRS cannot

assess or collect the disputed employment tax until

the litigation is final.

3.

The

Jeopardy-Assessment-Litigation

Exception. If a taxpayer “is preparing to do

something that will endanger the collection of his

taxes,” the IRS can terminate that taxpayer’s current

tax year and make the taxes for that year “due and

payable immediately.” Laing v. United States, 423

U.S. 161, 169-70 (1976). In Laing, this Court held that

the AIA didn’t prohibit a taxpayer from suing to

enjoin the IRS from collecting a jeopardy deficiency

(because in that case the IRS failed to follow certain

statutory procedures). Id. at 184 n.27. Congress

amended the Code partially in response to Laing.

Staff of Joint Comm. on Taxation, 94th Cong.,

General Explanation of the Tax Reform Act of 1976,

at 356-64 (Comm. Print 1976). Section 7429(b)

authorizes taxpayers to sue the government for

failing to follow the procedures required for a jeopardy

assessment or levy. Tax Reform Act of 1976, Pub. L.

No. 94-455, § 1204(c)(11), 90 Stat. 1520, 1699. It also

clarifies that the AIA does not bar a suit to enjoin IRS

collection activity during the pendency of such

litigation.

10

4. The Partnership-Litigation Exception. The

most recent AIA carve-out is section 6232(c), which is

part of the new partnership-audit regime. Bipartisan

Budget Act of 2015, Pub. L. No. 114-74, § 1101(c)(1),

129 Stat. 584, 633. Under that regime, if the IRS

determines that the net adjustments to partnership

income reflect an understatement of the tax liability

of the partners of the partnership for a particular

year, the IRS will determine the amount allegedly

owed—the “imputed underpayment.” I.R.C. §

6225(b)(1). That determination—of a particular

notional tax liability for a particular partnership—

triggers certain procedural options for challenging the

specific tax liability, including the ability of the

partnership to file a petition in a federal court within

90 days for a readjustment of the alleged

underpayment. I.R.C. § 6234(b)(1). Section 6232(c)

prohibits the IRS from assessing or collecting tax on

the alleged underpayment during the 90-day period

for filing a petition and until the court’s decision is

final.

These six exceptions go to the heart of the AIA—

they all contemplate (and except) challenges to the

IRS’s actions to assess and collect tax from particular

taxpayers with specific tax liabilities and with whom

the IRS has already taken some assessment or

collection action. The focal point of judicial review in

each of these exceptions, as with the AIA itself, is a

particular taxpayer’s tax liability—not a purely legal

dispute regarding a regulation’s validity that occurs

at a stage of the taxation process that precedes

assessment or collection.

B. The Collection-Litigation Exceptions. The

other seven exceptions preclude the government from

11

taking collection action when the taxpayer is already

challenging an ongoing IRS collection action.

1. Collection-Due-Process Proceedings. After

assessing a particular taxpayer’s tax liability, the IRS

may levy—seize and sell—the taxpayer’s property to

satisfy the unpaid liability. See I.R.C. Subtitle F, ch.

64 (Collection). To challenge that action, the taxpayer

can ask the IRS Office of Appeals to hear various

defenses to the collection action, challenges to the

appropriateness of collection actions, and collection

alternatives. I.R.C. § 6330(a)(3)(B), (c)(2). If a

taxpayer requests a hearing, then section 6330(e)(1)

prohibits the IRS from levying on property to satisfy

the taxpayer’s tax liability. That prohibition

continues if (1) the taxpayer and IRS Appeals cannot

resolve the disputed issues, (2) the IRS issues a notice

of determination, and (3) the taxpayer petitions the

Tax Court to review the determination. Again, this

AIA exception applies to specific action against a

specific taxpayer to collect a specific tax liability.

2. Divisible-Tax Litigation. Divisible taxes are

taxes on “each transaction or event.” Flora v. United

States, 362 U.S. 145, 171 n.37 (1960). They include

certain excise taxes as well as FICA, FUTA, incomewithholding taxes, and the 100% penalty under

section 6672. See Kafka & Cavanagh, supra, ¶

15.03[2]. The Tax Court lacks jurisdiction over such

taxes, so litigation occurs in refund forums. Id.; see

also I.R.C. § 6211 (limiting Tax Court jurisdiction to

income, estate, gift, and other specified taxes).

Normally, a taxpayer must pay the full amount of the

disputed tax to litigate in a refund forum. Flora, 362

U.S. at 177. Yet in disputes involving divisible taxes,

the taxpayer need pay only the amount related to a

12

single transaction or event. Section 6331(i) prohibits

the IRS from collecting tax by levy from particular

taxpayers if the taxpayer has pending federal

litigation for the recovery of a divisible tax.

3. The “100%” Penalty. In general, employers

must collect income tax from employees and pay those

funds to the government. I.R.C. § 3402. If a person

who is responsible for doing so fails to collect and pay

over such taxes, then section 6672(a) imposes a 100%

penalty on the full amount of taxes that were

supposed to be paid over. To sue for a refund of the

entire amount, a taxpayer need only pay the tax

applicable to a single employee. See, e.g., Steele v.

United States, 280 F.2d 89, 91 (8th Cir. 1960)

(responsible person may pay the portion of the

penalty applicable to the withheld taxes of any

individual employee, claim a refund, and sue to

determine the penalty liability for all other

employees). For an employer with many employees,

this amount could be a small fraction of the disputed

liability. If the “responsible person” properly files suit,

then section 6672(c) prohibits the IRS from taking

action to collect the rest of the disputed liability.

Section 6672(c) does so by allowing a court to enforce

that prohibition, notwithstanding the AIA.

4. Wrongful-Levy Litigation. Sometimes the

IRS attempts to collect tax from the wrong person. To

combat that error, Congress enacted section 7426(a)

and (b)(1), which offer the exclusive remedy for thirdparty wrongful-levy claims. Federal Tax Lien Act of

1966, Pub. L. No. 89-719, § 110, 80 Stat. 1125, 1143.

Thus, when the government attempts to seize and sell

a person’s property, and that property does not belong

to the taxpayer who is subject to the levy action, the

13

third party can sue to contest the levy. See EC Term

of Years Trust v. United States, 550 U.S. 429, 431-32

(2007). Section 7426(a) provides that an individual

may sue the United States for wrongful levy. Section

7426(b)(1) authorizes the federal district court to

enjoin the levy.

5.

Return-Preparer-Penalty

Litigation.

Section 6694(a) and (b) penalize tax-return preparers

who take unreasonable, willful, or reckless positions

on tax returns that cause an understatement of the

taxpayer’s tax liability. Congress added these

penalties to the Code in the Tax Reform Act of 1976 §

1203(b)(1). In 1978, Congress clarified that if a return

preparer challenges the penalty, the government

cannot invoke the AIA to bar an action against the

IRS. Act of Nov. 10, 1978, Pub. L. No. 95-628, § 9(b)(1),

92 Stat. 3627, 3633. Currently, section 6694(c) allows

a return preparer to pay only 15% of the asserted

penalty and then file a refund claim to challenge the

penalty. At that point, section 6694(c) precludes the

IRS from taking levy action until final resolution of

the dispute.

6.

The

Innocent-Spouse-Litigation

Exception.

The

Internal

Revenue

Service

Restructuring and Reform Act of 1998 included socalled innocent-spouse relief. Pub. L. No. 105-206, §

3201(a), 112 Stat. 685, 734. Typically, married

taxpayers who file a joint return are jointly and

severally liable for the entire tax liability. I.R.C. §

6013(d). Section 6015 provides equitable relief to

spouses who, under certain facts and circumstances,

should not be liable for the tax. If the IRS denies

innocent-spouse relief, then section 6015(e) gives the

14

Tax Court jurisdiction to determine whether the IRS’s

denial was erroneous.

Collectively, the thirteen enumerated exceptions

to the AIA confirm that the Act’s focus is on litigation

brought by specific taxpayers to enjoin currently

pending IRS assessment or collection action. These

exceptions were needed because the scope of the AIA

would otherwise block such suits. Not a single

exception concerns litigation—such as a preenforcement action under the APA—outside of

currently pending enforcement action.

II. A STRAIGHTFORWARD APPLICATION OF THE

PLAIN TERMS OF THE AIA CAN BE HARMONIZED

WITH THE APA’S STRONG PRESUMPTION OF

JUDICIAL REVIEW.

The AIA targets a particular remedy—the

equitable remedy of injunction. It was enacted in 1867

to prevent taxpayers from filing suit in equity for a

“bill to restrain” the assessment or collection of illegal

tax against them. See, e.g., Roger Foster & Everett V.

Abbott, A Treatise on the Federal Income Tax Under

the Act of 1894 231 (1895); Cutting v. Gilbert, 6 F. Cas.

1079 (C.C.S.D.N.Y. 1865) (suit for a “writ of

injunction” to “stay the assessment and collection” of

tax due on stock sales). These suits were problematic

because they permitted taxpayers to grind ongoing

assessment and collection to a halt. At the time,

Congress was not concerned about pre-enforcement

suits to challenge tax rules. Treasury did not issue

extensive rules, and the administrative state as we

know it had not yet materialized; the APA wasn’t

even a twinkle in Congress’s eye.

15

Since the 1946 enactment of the APA, Congress

has repeatedly amended and re-enacted the AIA and

never sought to expand the AIA to cover preenforcement challenges to agency rulemaking. This is

telling given the dramatic growth of the modern

administrative state. See City of Arlington, Tex. v.

FCC, 569 U.S. 290, 313 (2013) (Roberts, C.J.,

dissenting) (“The Framers could hardly have

envisioned today’s ‘vast and varied federal

bureaucracy’ and the authority administrative

agencies now hold over our economic, social, and

political activities.”) (internal citation omitted).

Congress’s choice to not amend the AIA to cover

pre-enforcement challenges to agency rulemaking

makes sense. A suit by a taxpayer to enjoin an

assessment or collection action differs from a preenforcement challenge to agency rulemaking.

Whereas suits to enjoin an assessment or collection

action under the AIA are taxpayer-specific,

challenges to an agency’s rulemaking are not.

Instead, a suit challenging agency rulemaking

generally focuses on whether the statute authorizes

the agency’s action, whether the agency’s

decisionmaking process was reasoned, and whether

the agency complied with pertinent procedural

requirements. See 5 U.S.C. § 706(2)(A), (C), (D).

Correspondingly, while a taxpayer’s challenge to

an assessment or collection action will enjoin

assessment or collection of tax if the suit is successful,

a pre-enforcement challenge to agency rulemaking

under the APA does not stop the IRS from assessing

or collecting tax against any taxpayer. For example,

even if a challenge to a regulation is successful and a

court vacates the regulation due to a failure of

16

reasoned decisionmaking, the IRS’s revenue and

collection agents still may pursue assessment and

collection actions against taxpayers under the

applicable statute and any remaining valid

regulations. The APA suit would simply have

established that a given regulation was invalid. It

does not stop the agency from doing anything.

While Congress was not concerned with suits to

challenge agency rulemaking when it enacted the

AIA, Congress did thoroughly consider challenges to

agency rulemaking when in enacted the APA.

Congress enacted the APA to implement procedures

to ensure that administrative agencies—which were

taking an outsized role in lawmaking—were

“accountable to the public and their actions subject to

review by the courts.” Franklin v. Mass., 505 U.S. 788,

796 (1992). Consistent with that intent, the APA

imposed

notice-and-comment

rulemaking

requirements to ensure that regulated parties could

participate meaningfully in the promulgation of rules.

5 U.S.C. § 553. The APA’s rulemaking requirements

facilitate “a genuine interchange” of views intended to

yield “improved rules.” See Conn. Light & Power Co.

v. Nuclear Regulatory Comm’n, 673 F.2d 525, 533

(D.C. Cir. 1982). “In enacting the APA, Congress

made a judgment that notions of fairness and

informed administrative decisionmaking require that

agency decisions be made only after affording

interested persons notice and an opportunity to

comment.” Chrysler Corp. v. Brown, 441 U.S. 281, 316

(1979).

For these requirements to have any teeth,

Congress knew that the public had to be able to

challenge the agency’s rulemaking. This was critical

17

because “courts retain a role, and an important one,

in ensuring that agencies have engaged in reasoned

decisionmaking.” Judulang v. Holder, 565 U.S. 42, 53

(2011). So Congress authorized judicial review under

the APA, including judicial review of agency

rulemaking, except to the extent precluded by statute.

5 U.S.C. § 701(a)(1). This Court has repeatedly

sanctioned pre-enforcement judicial review of agency

rulemaking. See, e.g., Abbott Labs. v. Gardner, 387

U.S. 136, 141 (1967). Indeed, pre-enforcement judicial

review is often the only effective way for regulated

parties

to

obtain

timely

and

meaningful

administrative review. The APA thus contains a

“strong presumption” in favor of judicial review,

Bowen v. Michigan Academy of Family Physicians,

476 U.S. 667, 670 (1986), and permits preenforcement challenges to agency rulemaking absent

“clear and convincing evidence” of congressional

intent to withhold judicial review. Abbott Labs., 387

U.S. at 141 (quoting Rusk v. Cort, 369 U.S. 367, 37980 (1962)); see also H.R. Rep. No. 79-1980, at 41

(1946).

The APA does not exempt tax regulations from

pre-enforcement challenges. “The IRS is not special in

this regard; no exception exists shielding it—unlike

the rest of the Federal Government—from suit under

the APA.” Cohen v. United States, 650 F.3d 717, 723

(D.C. Cir. 2011) (en banc). Permitting preenforcement challenges to tax rules harmonizes the

text and purpose of the APA and AIA. Without preenforcement review, Treasury is insulated from the

public accountability that Congress intended for all

agencies. Giving tax regulations a free pass from

prompt judicial scrutiny fosters uncertainty, delays

resolution of viable questions of regulatory validity,

18

and forecloses judicial review of many tax regulations

(given the financial and administrative difficulties of

challenging a regulation post-enforcement). And, as

detailed below, the uncertainty engendered by

barring pre-enforcement challenges complicates

compliance with the tax law and creates a drag on the

economy.

Despite this uncertainty, and contrary to the

APA’s presumption of judicial review, some lower

courts have elevated policy over plain statutory text

out of concern that permitting a pre-enforcement

challenge to a tax rule will allow taxpayers to recast

their suits to enjoin the assessment and collection of

their taxes as suits to challenge agency rulemaking.

They worry that this will “reduce the [AIA] to dust.”

CIC Servs., LLC v. IRS, 925 F.3d 247, 254 (6th Cir.

2019) (quoting Fla. Bankers Ass’n v. U.S. Dep’t of the

Treasury, 799 F.3d 1065, 1071 (D.C. Cir. 2015)). So

they apply the AIA beyond its original purpose and its

natural textual bounds to cover pre-enforcement suits

that might hamper taxation—as opposed to suits that

actually enjoin the IRS from assessing or collecting

tax against a particular taxpayer. This policy concern

is flawed in at least three ways.

First, the fear of pulverizing the AIA is unfounded.

The vast majority of IRS assessment and collection

efforts do not implicate challenges to agency

rulemaking. Suits that challenge a rulemaking

constitute a minuscule percentage of taxpayer

challenges to IRS action. The AIA would continue to

apply to bar suits by taxpayers to enjoin assessment

or collection actions, which was the sole problem that

the AIA was enacted to solve.

19

Second, the related premise that pre-enforcement

review will somehow hamper tax assessment and

collection actions is also mistaken. Resolving an open

question about a rule’s validity sooner rather than

later facilitates the assessment and collection of taxes

rather than hampers it. Certainty in the law

eliminates

confusion

and

minimizes

the

administrative problems caused by a court decision

that invalidates a regulation a decade or more after it

is issued. Abbott Labs., 387 U.S. at 154 (preenforcement review helps to “speed enforcement”).

Perhaps more importantly, pre-enforcement review

does not prevent the IRS from assessing or collecting

tax against a particular taxpayer. Even if an agency’s

rule is set aside, the IRS may—depending on the

circumstances—issue a new rule or continue to

pursue assessment and collection of tax based on the

applicable statute and on otherwise valid regulations.

Third, perceived policy concerns do not override

plain statutory text. “The right to review is too

important to be excluded on such slender and

indeterminate evidence of legislative intent.” Abbott

Labs., 387 U.S. at 141 (quoting Jaffe, Judicial Control

of Admin. Action 357 (1965). As shown above,

Congress has not foreclosed pre-enforcement judicial

review of tax rulemaking.

One additional policy concern merits particular

scrutiny. Lower courts often depart from the AIA’s

plain text based on the notion that the “manifest

purpose” of the AIA is to allow the IRS to assess and

collect taxes “without judicial intervention” and “to

require that the legal right to the disputed sums be

determined in a suit for refund.” Enochs v. Williams

Packing & Navigation Co., 370 U.S. 1, 7 (1962). This

20

process purportedly “assured [the United States] of

prompt collection of its lawful revenue.” Id. In the

context of Williams Packing, that policy makes sense.

If a particular taxpayer is already enmeshed in the

IRS assessment and collection process, then the

taxpayer must seek resolution through the proper

procedural paths provided to challenge IRS

assessment and collection actions. But taken out of

that context, and applied more broadly to the wholly

unrelated issue of pre-enforcement challenges to tax

rules, those policy justifications collapse.

For one thing, interpreting the AIA as channeling

all tax litigation to refund suits—in which a taxpayer

must pay the full amount of tax before filing suit—

contradicts multiple specific provisions of the Code,

including most of the AIA exceptions. Most tax

litigation is already “prepayment,” in the Tax Court.

According to IRS statistics, during the 10-year period

from 2007 to 2017, there was an annual average of

29,400 docketed tax cases. The split between the

deficiency forum and the refund forums is telling: 97%

of these cases were docketed in the Tax Court, while

all federal district courts and the Court of Federal

Claims handled the remaining 3%.7

The dollars at issue tell a similar story. The

average annual amounts in dispute over that same

10-year period were $32 billion, with about 68%

litigated in the Tax Court and the remaining 32%

split between the federal district courts and the Court

7 See Am. Bar Ass’n, Tax Section Court Procedure Comm., IRS

Office of Chief Counsel FY 2018 & FY2019 2d Quarter

presentation, slide 5, https://procedurallytaxing.com/statisticson-cases-in-litigation-from-aba-tax-section-meeting-in-may/.

21

of Federal Claims.8 The IRS apparently hasn’t

provided more detailed numbers, but some

percentage of tax dollars at issue in the refund forums

relates to taxpayers who sat on their rights and

missed the 90-day window to petition the Tax Court

or to situations in which Tax Court specifically lacked

jurisdiction.

The vast majority of tax litigation thus arises

under the Code sections listed in the AIA’s thirteen

enumerated exceptions, which authorize taxpayers to

sue to preclude assessment or collection in many

circumstances. That broad ability to sue before the

IRS assesses or collects tax wholly undermines the

tired, old canard that the AIA is necessary to keep tax

dollars flowing to the federal fisc. If Congress had that

concern, it wouldn’t have allowed any of the AIA

exceptions and instead would have forced all

taxpayers into refund litigation.

If Congress was concerned about the effect of APA

actions on the public fisc, it could have amended the

APA or the Code to preclude judicial review of some

category of challenges to tax regulations. Indeed, the

APA contemplates that statutes may preclude judicial

review. 5 U.S.C. § 701(a)(1) and (2). But these carveouts are narrowly construed. See Abbott Labs., 387

U.S. at 141 (the APA’s “‘generous review provisions’

must be given a ‘hospitable’ interpretation”) (quoting

Shaughnessy v. Pedreiro, 349 U. S. 48, 51 (1955)).

In remarkably similar circumstances, this Court

has rejected an agency’s attempt to apply a statutoryreviewability prohibition beyond its terms. In Reno v.

American-Arab Anti-Discrimination Commission,

8 Id. at slide 3.

22

525 U.S. 471, 478 (1999), the Justice Department

contended that an immigration statute restricted

judicial review of “all or nearly all deportation

claims.” The statute, 8 U.S.C. § 1252(g), generally

prohibits a court from “hear[ing] any cause or claim

by or on behalf of any alien arising from the decision

or action by the Attorney General to commence

proceedings, adjudicate cases, or execute removal

orders against any alien under this [Act].” This Court

concluded that far from precluding review of all

deportation claims, the statute was limited to the

three specific agency actions mentioned in its text: the

decisions to (1) commence proceedings, (2) adjudicate

cases, and (3) execute removal orders. The statute did

not apply more broadly to the “many other decisions

or actions that may be part of the deportation

process.” Reno, 525 U.S. at 482. Congress’s focus on

these “three discrete events” was not “a shorthand

way of referring to all claims arising from deportation

proceedings.” Id. This Court noted that it was “aware

of no other instance in the United States Code in

which language such as this has been used to impose

a general jurisdictional limitation.” Id. Yet that is

precisely what the Government attempts to do with

the AIA. Rather than giving meaning to “restrain[],”

“assessment,” and “collection,” the Government (and

the court below) erased those terms and penciled in

“affect taxation.” Two discrete parts of the taxation

process do not embrace the whole. This Court should

apply the AIA in the same way that it applied 8 U.S.C.

§ 1252(g)—by its terms, and consistent with the

APA’s strong presumption favoring judicial review.

23

III. AN OVERBROAD APPLICATION OF THE AIA

PERPETUATES

TREASURY’S

LACK

OF

ACCOUNTABILITY AND FOSTERS UNCERTAINTY

AMONG REGULATED PARTIES.

The government wants to use the AIA to insulate

Treasury from any pre-enforcement judicial review.

This blanket immunity is bad for everyone. It is bad

for our judicial system because it makes it harder for

courts to timely review agency rules. It is bad for

Congress because it makes it harder to ensure that

Treasury adheres to statutory mandates. It is bad for

our tax system because it delays certainty and takes

one or two decades simply to get clarity on whether a

tax regulation is valid. It is bad for taxpayers because

the resulting uncertainty makes it harder to conduct

business and report and pay taxes. It is bad for the

government because a dubious regulation makes it

harder to audit taxpayers and ensure uniform

application of the tax laws. And it is bad for the

economy because uncertain tax laws increase

compliance costs and result in less investment.

Prolonged uncertainty in the tax law festers and

causes more pain for everyone. Flatly prohibiting preenforcement judicial review exacerbates the problem.

Prompt judicial review resolves questions about an

agency’s rulemaking soon after the rulemaking is

final. And prompt validity challenges facilitate clarity

before any taxpayer files a tax return for the first

affected taxable year.

Without pre-enforcement review, a taxpayer must

wait until the first taxable year impacted by the

regulation closes, prepare its tax return, and then

challenge the rulemaking either through a refund or

a deficiency suit. For a refund suit, the taxpayer must

24

pay the disputed tax, prepare and submit a refund

claim, wait until the IRS acts (or fails to act) on that

claim, and file suit. I.R.C. § 7422. Completing all of

these steps may take several years. The issues in

litigation are not limited to the validity of the

rulemaking. The government may challenge any

aspect of the taxpayer’s tax liability to show that no

refund is due. Lewis v Reynolds, 284 U.S. 281, 283

(1932) Accordingly, refund suits frequently involve

extensive discovery and require resolution of issues

beyond the challenged rulemaking. Resolving the

issues in a refund suit could take a decade or more.

Deficiency suits take even longer. After filing a

return, the taxpayer must wait for the IRS to begin

an audit, which could take one to three years from the

time the taxpayer files its income tax return. The IRS

generally takes another two to five years to complete

the audit and to determine adjustments by issuing a

Notice of Deficiency. I.R.C. § 6212. Only then can the

taxpayer bring a deficiency suit in the Tax Court,

which could take several more years to resolve.

Forcing taxpayers to challenge tax rules only

through refund or deficiency suits keeps invalid

regulations in force for upwards of 20 years or more.

See, e.g., Dominion Res., Inc. v. United States, 681

F.3d 1313 (Fed. Cir. 2012) (tax regulation vacated 18

years after finalization). In the interim, affected

taxpayers must deal with the resulting uncertainty,

which increases compliance costs, complicates

decisions as to whether to make a particular

investment or pursue a particular business

transaction, and exposes taxpayers to civil or criminal

penalties for non-compliance with the potentially

invalid regulation. See PricewaterhouseCoopers,

25

Paying Taxes: The Compliance Burden 10 (compliance

costs increase by an average of 39% in systems in

which tax rules are complicated or ambiguous); NFIB

Research Found., Regulations, 13 Nat’l Small Bus.

Poll 7 (2017) (tax rules cause the greatest difficulties

of

any

type

of

regulation),

http://www.411sbfacts.com/files/Regulations%202017

.pdf. Public companies also must deal with financialaccounting reserves that distort financial reporting

when based on uncertainty about whether particular

IRS guidance has the force of law.

And if a regulation is ultimately held to be invalid,

taxpayers must file amended returns to have their

dollars returned, which increases costs and

compliance burdens. Moreover, the long delay

between the issuance of a rule and enforcement

means that the millions of taxpayers that are unable

to challenge invalid regulations post-enforcement

often lose their right to recover the taxes unlawfully

collected by the IRS—the Code generally bars suits

for claims filed more than three years after the return

is filed or more than two years after the tax is paid

(whichever occurs later). I.R.C. § 6511(a). Taxpayers

thus can lose hundreds of millions of dollars that the

IRS had no legal right to collect.

Shrouding tax regulations in “a fog of uncertainty”

undermines the entire purpose of written laws, which

“are meant to be understood and lived by.” Wis. Cent.

Ltd. v. United States, 138 S.Ct. 2067, 2074 (2018).

Uncertainty increases the number of tax disputes to

the detriment of our judicial system, our system of tax

administration, and our taxpayer community. See

Staff of Joint Comm. on Taxation, Complexity in the

Federal Tax System (JCX-49-15), at 16-17 (Mar. 6,

26

2015) (complexity and ambiguity in the tax laws may

increase disputes and costs for the government and

taxpayers). And it is an empirical fact that individuals

and businesses (small and large) abandon certain

investments and other economically productive

activities because of uncertain tax laws. See Martin

Jacob et al., Real Effects of Tax Uncertainty: Evidence

from Firm Capital Investments (2019) (“finding that,

on average, firms facing relatively higher tax

uncertainty delayed large capital investments and

had

lower

annual

capital

expenditures”),

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=

2518243. This uncertainty could produce fewer jobs,

reduce capital investments, and cripple U.S.

competitiveness in the global marketplace.

Pre-enforcement review decreases the time in

which the law is uncertain and eliminates the

multitude of problems that arise when it takes one or

two decades to fully resolve a question of regulatory

validity. It also permits Treasury to fix procedural

defects quickly. If a court invalidates a tax regulation

in response to a timely pre-enforcement challenge,

Treasury can cure any procedural errors promptly. In

contrast, a regulation invalidated after 15 or 20 years

limits Treasury’s ability to take necessary corrective

action. Hampering the IRS’s ability to take prompt

corrective action can deprive the public fisc of billions

of dollars of tax revenues that it could have otherwise

collected, creating the very problem that the AIA

seeks to solve.9 Moreover, pre-enforcement litigation

that is relatively contemporaneous with issuance of a

9 While section 7805(b)(4) allows Treasury to correct “procedural

defects” retroactively, the scope of that remedy is limited by the

timing restrictions of section 7805(b)(1).

27

tax regulation helps to ensure that the full

administrative record is intact, easy to locate, and not

obscured, lost, or destroyed over time.

Further, pre-enforcement review avoids placing

taxpayers in the no-win position of having to risk

substantial civil or criminal penalties by intentionally

violating a dubious regulation in order to challenge

the agency’s rulemaking. I.R.C. § 6662(b)(1); Treas.

Reg. § 1.6662-3(b)(2) (imposing 20-percent penalty for

disregard of rules or regulations, which Treasury

interprets to include temporary regulations and IRS

Notices

issued

without

notice-and-comment).

Taxpayers should not be required to risk criminal

exposure or serious financial penalties to challenge a

tax regulation.

Facilitating judicial review also reduces noncompliance with the APA’s rulemaking requirements

by holding Treasury more accountable through timely

judicial review. Treasury has a long and troubling

history of disregarding the APA’s notice-andcomment rulemaking requirements. See, e.g., Kristin

Hickman, Coloring Outside the Lines: Examining

Treasury’s (Lack of) Compliance with Administrative

Procedure Act Rulemaking Requirements, 82 Notre

Dame L. Rev. 1727 (2007) (detailing Treasury’s spotty

track record of compliance with the APA’s notice-andcomment requirements). The IRS’s regulatorydrafting guidance encourages this non-compliance by

contending that “most IRS/Treasury regulations are

interpretative, and therefore not subject to the noticeand-comment provisions of the APA.” IRM

32.1.5.4.7.4.1(3) (Aug. 21, 2018). Yet despite this

Court’s holdings that legislative rules have the force

and effect of law and interpretive rules do not (see,

28

e.g., Perez v. Mortgage Bankers Association, 575 U.S.

92, 95-97 (2015)), the IRS claims that “IRS/Treasury

regulations have the force and effect of law even

though they are interpretative regulations.” IRM

32.1.5.4.7.4.1(9) (Aug. 21, 2018).

Even when Treasury acknowledges applicability of

the APA, it has attempted to bypass the notice-andcomment process by inappropriately invoking the

APA’s good-cause exception. Although that exception

typically applies only “in emergency situations, or

where delay could result in serious harm,” Jifry v.

FAA, 370 F.3d 1174, 1179 (D.C. Cir. 2004) (internal

citation omitted), Treasury asserts good cause for

dispensing with notice-and-comment rulemaking

because delaying the effective date “would provide

taxpayers with the opportunity to engage in the

transactions to which these rules relate with

confidence that they achieve the intended tax

avoidance results absent the applicability of the

regulations.” See, e.g., 84 Fed. Reg. 28,398, 28,406.

This generic assertion could apply to any Treasury

regulation and pales in comparison to the life-ordeath situations courts have recognized as actually

constituting good cause.

Although Treasury’s threadbare explanation

would likely fail to withstand a procedural challenge,

an overbroad application of the AIA precludes such a

challenge, which generally needs to be made

immediately, as long-delayed challenges are either

flatly rejected or met with judicial skepticism. See,

e.g., Publ. Citizen v. Nuclear Regulatory Comm’n, 901

F.2d 147, 152 (D.C. Cir. 1990) (emphasizing the

circuit’s rule that “a statutory review period

permanently limits the time within which a petitioner

29

may claim that an agency action was procedurally

defective”). In the absence of pre-enforcement

challenges, Treasury is encouraged to ignore basic

procedural requirements and then later to argue that

a taxpayer’s APA suit is time-barred. This creates “a

world in which no challenge to [the IRS’s] actions is

ever outside the closed loop of its taxing authority.”

Cohen, 650 F.3d at 726.

More problematic than disregarding the APA’s

procedural requirements, Treasury has taken a step

further, promulgating regulations that are contrary

to statute. Three examples from Treasury’s recent

regulations under the Tax Cuts and Jobs Act, Pub. L.

No. 115-97, 94 Stat. 2390 (2017) (“TCJA”), are

illustrative.

The TCJA profoundly altered the U.S. system of

international taxation, implementing the most

sweeping reform in decades. Dissatisfied by some of

Congress’s policy choices, Treasury undertook to

“rectify” those policy decisions under the guise of

interpreting the law. First, in Treasury Regulation

section 1.78-1(c), Treasury instituted a “special

applicability date,” altering the effective date

Congress prescribed for amendments to section 78.

Second, in Treasury Regulation section 1.245A-5T(c),

Treasury disallowed a deduction under section 245A

with respect to amounts that meet all the statutory

requirements Congress established for the deduction.

Third, in Treasury Regulation section 1.9655(c)(1)(ii), Treasury ignored limiting language (“for

purposes of”) under section 965(b)(4)(A), thereby

expanding the scope of the statute and denying

foreign tax credits that Congress expressly

authorized.

30

These examples highlight Treasury’s disregard for

the bounds of statutory authority and its propensity

for substituting its own policy judgment for the policy

choice in the statute, blatantly ignoring this Court’s

mandate that an agency “must give effect to the

unambiguously expressed intent of Congress.”

Chevron U.S.A., Inc. v. Natural Resources Def.

Council, Inc., 467 U.S. 837, 842-43 (1984). Although

the tax community has widely acknowledged the

invalidity of Treasury’s rules in the above examples,

such rules nonetheless purport to have the effect of

law, and taxpayers who disregard the rules are

threatened with substantial penalties. As noted

above, if challengers are denied a voice until

enforcement, they face fact-intensive litigation often

involving extensive discovery, an extensive

stipulation process, analysis of wholly collateral

issues, and a host of other factors increasing the time

and resources necessary to bring a challenge.

Because few taxpayers are willing and able to

make the investment required to hold Treasury

accountable on a post-enforcement basis, an

overbroad reading of the AIA inhibits the judicial

check needed to ensure that Treasury acts only in

accordance with delegated authority. Agencies can

issue rules with the force and effect of law, but “[t]he

judiciary is the final authority on issues of statutory

construction and must reject administrative

constructions which are contrary to clear

congressional intent.” Chevron, 467 U.S. at 843 n.9.

As discussed above, the AIA was intended to preclude

interference with the IRS's tax enforcement actions,

not to shield regulatory interpretations from judicial

review.

31

In sum, the AIA does not justify the stark disparity

between tax and other areas of regulation, in which

regulated parties can bring pre-enforcement

challenges to agency action to obtain clarity in the law

and avoid inconsistent and inefficient outcomes.

Treasury’s failure to comply with the APA and its

disregard for the bounds of executive authority create

uncertainty within a body of law that demands

clarity. A fair and historically faithful reading of the

AIA enables pre-enforcement judicial review and

restores Treasury to accountability.

CONCLUSION

For the foregoing reasons, this Court should

reverse the decision below and clarify that the AIA

does not bar pre-enforcement challenges to the

validity of tax rules under the APA.

Respectfully submitted,

JOSEPH B. JUDKINS

Counsel of Record

A. DUANE WEBBER

GEORGE M. CLARKE

DANIEL A. ROSEN

JOSHUA ODINTZ

PHILLIP J. TAYLOR

ELAINE WILKINS

BAKER & MCKENZIE LLP

815 Connecticut Ave NW

Washington, DC 20006

(202) 452-7000

joseph.judkins@

bakermckenzie.com

Counsel for Amici Curiae

July 2020