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On May 17, 2021, the Supreme Court unanimously reversed the Sixth Circuit’s decision in CIC Services. The Supreme Court held that certain pre-enforcement challenges of IRS reporting requirements are not precluded by the Anti-Injunction Act (AIA) even though a violation of the rule may result in a tax penalty. A link to the Supreme Court’s decision can be found here.

Notice 2016-66, 2016-47 IRB 745, identifies certain micro-captive agreements as reportable transactions. The Notice requires taxpayers and material advisors associated with micro-captive transactions to prepare and submit extensive disclosures to the IRS. Noncompliance with the Notice can result in both non-tax criminal penalties and civil tax penalties.

CIC Services (“CIC”), a material advisor to taxpayers participating in micro-captive transactions, brought suit challenging the reporting requirements in the Notice. CIC asserted that the IRS violated the Administrative Procedure Act (“APA”) by issuing the Notice without notice-and-comment procedures. CIC requested that IRS Notice 2016-66 be set aside as an unlawful agency action. The IRS responded, and district court agreed, that the AIA precluded a pre-enforcement challenge. Instead, to challenge the Notice, CIC must first disobey the Notice and then sue for a refund of any resulting penalty. A divided decision from the Sixth Circuit Court of Appeals affirmed.

While the AIA generally precludes suits that will “enjoin” the collection of taxes, CIC argued it wasn’t seeking to enjoin tax collection, but instead an onerous and burdensome reporting requirement. In fact, the reporting requirement was unrelated to any tax CIC would have to pay. The IRS argued that failure to comply with the reporting requirement would result in a penalty, which is treated as a tax, meaning the suit sought to enjoin the tax. However, CIC argued that it had no intention of violating the rule, incurring fines and potential criminal penalties, which meant it would never have the opportunity to bring the challenge.

In determining whether the AIA applied, the Supreme Court looked to the “action’s objective aim—essentially, the relief the suit requests” in determining the “suit[‘s] purpose.” The Court determined that CIC’s purpose was to set aside IRS Notice 2016 and declare it as unlawful for violating the APA, not to preclude the collection of taxes. Therefore, CIC’s suit was not barred by the AIA. The concurring opinion noted that if an affected taxpayer had brought the suit, the outcome would not be the same.

The Court’s decision marks a substantial win for those impacted by IRS rules, providing an avenue for challenge before being forced to incur penalties. Whether taxpayers will be able to avail themselves of this exception to the AIA in certain circumstances remains an open question.