Monday, May 17, 2021

Supreme Court Opinion in CIC Services LLC On Risk of Criminal Penalty Aspects (5/17/21)

The Supreme Court this morning decided CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, holding that § 7421(a), the Anti-Injunction Act, did not preclude pre-enforcement review of an IRS Notice requiring “material advisors” in  micro-captive transactions to report information.  I have posted a blog on my Federal Tax Procedure Blog, Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21), here.  The Supreme Court holding implicates tax procedure issues, but one excerpt may be interesting to tax crimes enthusiasts (slip Op. 11-12).

Third, violation of the Notice is punishable not only by a tax, but by separate  criminal penalties. As noted above, any “[w]illful failure” to comply with the Notice’s reporting rules can lead to as much as a year in prison. §7203; see supra, at 3–4. That fact clinches the case for treating a suit brought to set aside the Notice as different from one brought to restrain its back-up tax. For the existence of criminal penalties explains why an entity like CIC must bring an action in just  this form, framing its requested relief in just this way. Recall what the Government would [*12] have such a party do: disobey the Notice, pay a resulting tax penalty, and then bring a refund suit. See Brief for Respondents 16–17; supra, at 5. That approach—not the Anti-Injunction Act’s familiar pay-now-sue-later  procedure, but one with lawbreaking at the start—subjects the party to criminal punishment. n3 And that is not the kind of thing an ordinary person risks, even to contest the most burdensome regulation. So the criminal penalties here  practically necessitate a pre-enforcement, rather than a refund, suit—if there is to be a suit at all. And so too, those penalties necessitate a suit aimed at eliminating the Notice, rather than the statutory tax penalty. Only an injunction against the Notice gives the taxpayer or advisor what it wants: relief from the obligation to report transactions. An injunction against the tax penalty would not do so. Because such an injunction would leave both the reporting duty and the criminal penalty untouched, the taxpayer or advisor would still have to accede to the Notice’s demands on pain of prison time. Small wonder that CIC’s complaint asks  for an injunction against the Notice, not one against the tax penalty helping to enforce it. Contrary to the Government’s assertion, those injunctions are not two sides of one coin.

   n3 The Government suggests that criminal liability would not attach to a taxpayer or advisor who refuses to comply with the Notice out of a “good faith” objection to its validity. Brief for Respondents 46. It is easy to see why the Government  wishes that were true: In none of our Anti-Injunction Act cases has postponing a taxpayer’s suit until after payment exposed him to criminal penalties—because in no other case has that approach required a taxpayer to break a law in the first instance. But this Court’s precedent precludes the Government’s effort to erase the criminal penalties from this case. We have held in no uncertain terms that “a defendant’s views about the validity” of a tax provision—even if held “in good faith”—do not “negate[ ] willfulness or provide[ ] a defense to criminal  prosecution.” Cheek v. United States, 498 U. S. 192, 204, 206 (1991). So in failing to report transactions as the Notice requires, an advisor like CIC would risk criminal punishment.

JAT Comments:

1. This issue came up at oral argument, as I previously reported:  Discussion of Criminal Tax Issues in Oral Argument in CIC Services (Federal Tax Crimes Blog 12/5/20), here.  As I said in that blog:

3.  I am not sure that Cheek supports the proposition that a person who knows of the obligation to report can just not report without the risk of criminal prosecution simply because he thinks the obligation is illegal and is willing to contest the matter in civil litigation consistent with the AIA (here, particularly a refund suit).

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