Courts Set Limits to Anti-Injunction Act Post-CIC Services | McDermott Will & Emery
Since the decision of the Supreme Court of the United States in CIC Servs., LLC c. IRS was issued in May 2021, courts have debated how to apply the Anti-Injunction Act (AIA) in other contexts. The United States Court of Appeals for the Eleventh Circuit recently upheld the dismissal of an AIA lawsuit in Hancock County Land Acquisitions, LLC v. United Stateswhile the First Circuit Court of Appeals recently ruled that the AIA does not preclude a challenge to the Internal Revenue Service’s (IRS) use of John Doe’s summons in Harper v. Rettig.
In July, we published an article about a circuit split between the Sixth and Eleventh Circuits due to alleged violations of the Administrative Procedure Act (APA). As discussed below, these post-CIC Services decisions shape the boundaries of APA and AIA-based challenges.
THE ELEVENTH CIRCUIT
The taxpayer in this case claimed a $180 million deduction for a conservation easement on land he owned in Mississippi. The IRS audited the taxpayer and requested an extension of the assessment statute of limitations in Section 6501 of the Internal Revenue Code (IRC). The taxpayer initially refused, but 11 months after the request agreed to extend the statute of limitations. At this point, the IRS had nearly completed its review, 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 U.S. federal district court, arguing, among other things, that the IRS violated the APA when it failed to refer the matter to IRS appeals, which deprived the taxpayer of the pre-litigation administrative resolution of his tax dispute. The IRS decided to dismiss the complaint for lack of jurisdiction in the matter, which the district court granted.
On appeal, the taxpayer argued that the lawsuit was not barred by the AIA, citing CIC Services. The Eleventh Circuit, however, explained that the three considerations that led to this conclusion in CIC services were the “three same considerations [that] lead to the opposite conclusion here. The Court found that the taxpayer: (1) would not be subject to separate and distinct costs of the FPAA tax penalty; (2) was about to be held liable when he filed his lawsuit and (3) would face no criminal penalties by following the AIA’s familiar “pay now and sue later” procedure. The Court said, “at its heart, this lawsuit is a ‘tax dispute'” and it was far from clear that in no event 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 bitcoins into his account in 2013 and 2014. In 2015, he began liquidating his bitcoin holdings, which lasted until 2016 when his holdings were depleted. At that time, the taxpayer and his wife held bitcoins on two other digital currency exchanges. The taxpayer declared and paid taxes on the capital gains of his bitcoin holdings during the 2016 to 2019 tax years.
In 2016, the IRS filed a ex parte “John Doe” administrative summons on the first digital currency exchange, which the exchange objected to. The IRS reduced the scope of the subpoena, which the exchange again opposed. After a hearing, the district court allowed the government to enforce the subpoena with respect to three of the six claims contained in the subpoena.
In 2019, the IRS advised the taxpayer that he had information about his virtual currency accounts and believed he may not have reported his virtual currency transactions correctly. Additionally, the IRS warned the taxpayer that they could face civil or criminal prosecution for reporting the transactions inaccurately. The taxpayer sued on multiple grounds, alleging that the third-party summons violated his rights by illegally obtaining his financial information from digital currency exchanges.
The district court denied the taxpayer’s claims for damages (which he did not appeal) and dismissed his claim for declaratory relief and injunctive relief under the AIA for lack of jurisdiction in the matter. The taxpayer appealed to the First Circuit and argued that his lawsuit was not barred by the AIA because it concerned the information-gathering function of the IRS rather than the assessment or collection of tax.
The First Circuit agreed with the taxpayer. Resting on CIC Servicesthe Court held that “‘[t]it disputes and seeks relief from a separate legal wrong – the allegedly unlawful acquisition and retention of the appellant’s financial records…(and) the appellant'[s]twhile nowhere near the limit of liability to tax. The court returned the case to the district court to consider whether the taxpayer had filed a claim on which relief could be granted.
Practical point: These two recent appellate decisions involve facts and circumstances that have led to different results. What the cases illustrate is continued litigation over the proper scope and application of ABS and AIA after CIC Services. The courts seem to dig deeper into the heart of the lawsuit, deciding whether it is tax liability or some other challenge not prohibited by administrative law. We hope to see this battle continue in the years to come.