NICK EICHER, HOST: It’s Monday the 28th of December, 2020. Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Nick Eicher.
MARY REICHARD, HOST: And I’m Mary Reichard. Well, it’s time for Legal Docket.
And this week, my co-host on the Legal Docket podcast stood in for me and gave me the gift of time: some excellent time to spend with my family over the holidays. I’m so grateful for that. We really look out for one another here.
EICHER: Exactly right. Well, a new year is right around the corner, right around the end of the week. The Supreme Court resumes hearing oral arguments two weeks from now.
So today, as you said, WORLD reporter and lawyer Jenny Rough will catch us up on two oral arguments the court heard this month.
One deals with mortgages, and the other, taxes.
JENNY ROUGH, REPORTER: Not only is January the start of the New Year, it’s also the beginning of tax season! That brings me to the first of two cases today. A tax law case: CIC Services v. IRS.
IRS meaning the Internal Revenue Service.
Tax litigators and tax professors are going nuts over this. I’m not sure anyone else is, but WORLD reports on every Supreme Court case. Even if a case doesn’t involve an exciting issue, it’s always important.
Okay. Typically, you might think of the IRS as a government agency that enforces tax laws. The IRS goes after you. Here, a consulting firm called CIC Services is returning the favor—going after the IRS. CIC claims the IRS violated a law that the IRS is required to follow.
I’ll try to stay out of the weeds, but it’s important to know that CIC advises its clients on transactions known as micro-captive insurance transactions. Forbes writer Peter J. Reilly said that term sounds like an evil city you’d read about in a DC Comic strip.
Alas, it’s not that exciting.
But the IRS sees micro-captives as a scheme, abusive tax shelters. So the IRS issued a Notice [Notice 16-66] that demands CIC to turn over its client list. CIC claims the IRS failed to follow proper procedures, and as a result the Notice is invalid. So it sued the IRS.
You can sue the IRS. But the question of when—under what circumstances you can sue the IRS—that’s complicated. And that’s what the parties are fighting about here.
As a general rule, if you think the IRS is messing up, you go ahead and pay your taxes. Then sue for a refund. That rule—pay now, fight it later—is based on a 1867 law, passed shortly after the Civil War. It’s called the Anti-Injunction Act.
The theory behind it: That a government cannot function if it cannot collect taxes efficiently and quickly.
But CIC argues the pay-now-litigate-later rule shouldn’t apply here. Instead, the court should allow an exception. Because there is no tax to pay. There’s only information to report. How would they sue for a refund? Cameron Norris argued on behalf of CIC Services.
CAMERON NORRIS: CIC is challenging the Notice, not the assessment or collection of any tax. There is no tax for CIC to pay here. The Notice is not a tax, and CIC is a material advisor, not the taxpayer.
Several justices pointed out if CIC does not disclose its client list, it will incur tax penalties, and tax penalties are taxes.
But let’s say CIC does not report the information. A willful failure to comply could make the firm guilty of a crime. The firm is stuck. Disclose the info and it won’t be penalized. Thus it cannot sue for a refund. Thus it cannot have its day in court.
But not disclosing could land you in jail for tax fraud.
Justice Samuel Alito indicated that sounded unfair and unreasonable. How would a firm ever challenge a disclosure requirement?
ALITO: The code says that willfully failing to comply with the reporting requirement is a crime. So I really don’t see how they can get review without committing a crime.
Justice Stephen Breyer asked the IRS: What’s a taxpayer to do?
BREYER: I’m simply asking how do they get judicial review without paying the tax — the penalty, which I’ll call a tax, how do they get judicial review of the lawfulness of the order that says — or the report that says give us the information? How do they do it?
Jonathan Bond argued for the IRS. He said CIC simply needs to make a note in good faith alerting the IRS that it’s not complying and stating why.
BOND: What you do is you file a return and state your specific objection to particular information that you don’t want to provide because you believe in good faith that it is not legally required. The IRS can then assess a penalty which then you can sue over in a refund suit.
Think of it this way. Say you won $100 in a charity raffle and you don’t believe you owe taxes on it. You can state that on your tax return. You haven’t committed a crime. You had no evil intent to deceive. You red-flagged it.
Still, those penalties deter taxpayers from bringing challenges.
Justice Neil Gorsuch raised another matter. He said the IRS fails to comply with certain procedures about 40 percent of the time. And given its growing power, that seems problematic.
GORSUCH: Today, of course, the IRS regulates enormous swaths of the national economy, from our medical care to our pensions, to the entire nonprofit sector, a lot of the educational sector, child care. … Should we be concerned?
Lawyer Bond continued to insist there is a proper time to raise a challenge to the IRS. And CIC made the wrong choice about that.
The court has made an exception before in a previous case that involved a different statute that contained similar language. CIC relies on that to say the circumstances here are similar. The IRS argues no. Different statute, different case.
Perhaps the court will resolve this case by carving out a specific exception to the Anti-Injunction Act. A solution Justice Amy Coney Barrett suggested to CIC attorney Norris:
BARRETT: Would it be cleaner for us to go the Regan route but maybe, you know, phrase it this way? That this is covered by the AIA. However, because you would have to incur criminal penalties in — in — in order to sue, that you have no adequate alternative remedy. So even though the AIA applies, it doesn’t bar your suit? Would you be satisfied with that approach?
NORRIS: We would, Justice Barrett. We just want to go litigate our APA claims, and that — that resolution would be fine with us.
CIC has lost twice in lower court. If the firm wins at the Supreme Court, it would make it harder for the IRS to put a quick stop to tax schemes and abuses. And it could open the door so that every Tom, Dick, and Sally taxpayer who is aggravated with the IRS says, we don’t have to wait to sue, we fall in the exception. If the IRS wins, it would continue to limit the point in time that a taxpayer can challenge a rule. And make it easier for the IRS to skirt its legal duty to follow proper procedures.
The second case is Collins v. Mnuchin. I’m going to pair it down as much as possible.
The plaintiffs in Collins are shareholders of Fannie Mae and Freddie Mac. Fannie and Freddie are government-backed mortgage lenders that played a role in the collapse of the housing market in 2008. Following that disaster, Congress enacted a statute [HERA] that created a new federal agency, the Federal Housing Finance Agency.
The statute included what’s known as a removal clause.
That said that the director who runs the agency can only be removed for-cause by the president. Not at will. The idea behind such removal clauses is to keep the position apolitical.
One question in this case is whether that removal clause violates Article II of the United States Constitution. Article II says: “The executive Power shall be vested in a President of the United States of America.”
If the court finds the structure of the agency does violate the Constitution, what is the fix? Is every action the director took invalid? Justice Brett Kavanaugh wondered about the precedent.
KAVANAUGH: You mentioned a slippery slope argument If this agency structure was unconstitutional, then so too would be the Social Security Administration, the Office of Special Counsel, which are also headed by single directors, and I think the Solicitor General agrees on that.
Another fix could be for the court to take a legal scalpel, as it were, sever the provision, and leave the rest of the act in place. That’s the approach the court took with a similar case last year.
And that’s it for this week’s Legal Docket.