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:

Sixth Circuit Holds that Courts Cannot Enjoin IRS From Receiving or Using Alleged Confidential Info from Former Attorney (11/13/19)

In Gaetano v. United States, 2019 U.S. App. LEXIS 33164 (6th Cir. 2019), here, the Gaetanos (husband and wife) sued the United States to enjoin the IRS from receiving and using attorney-client confidential information that their former attorney, Goodman, did or might share with the IRS.  The Court opens with this good succinct introduction of the factual background and holding.

Richard and Kimberly Gaetano trusted Gregory Goodman as their legal advisor and business partner in running a cannabis operation. That trust was spurned.  The Gaetanos ended the relationship after ethics violations undid Goodman's license to practice law. He retaliated by assisting the Internal Revenue Service in a tax audit against them. Concerned about what Goodman might reveal, the Gaetanos sued the government to prevent it from discussing attorney-client confidences with him. The Anti-Injunction Act bars the lawsuit, and the Williams Packing exception does not apply. See 26 U.S.C. § 7421(a); Enochs v. Williams Packing & Navig. Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962).

The district court dismissed the complaint.  On appeal, the Sixth Circuit held that dismissal was proper on jurisdictional grounds because of the Anti-Injunction Act, § 7421(a).  In summary, the Court held:

1.  The claim of violation of the Sixth Amendment right to counsel was improper because that is a right that attaches when prosecution is commenced.  There was no prosecution (at least not yet).

2.  The claim of violation of due process was improper.  The Court reasoned (cleaned up):

The Gaetanos next seek refuge in the Due Process Clause of the Fifth Amendment. As a creation of the common law, not the Constitution, the attorney-client privilege cannot by itself provide the basis for a due process claim. Support for the Gaetanos' position thus must come from somewhere else, in this instance from cases holding that deliberate preindictment intrusions into the attorney-client relationship may prove so pervasive and prejudicial as to imperil the fairness of subsequent proceedings.  

Vanishingly few decisions have found a due process violation for government intrusion into the attorney client relationship. The few cases generally involved nefarious government conduct,  such as infiltrating a defense lawyer's office. And in the lion's share of cases, courts treat these due process claims with suspicion. For our part, we have never found a Fifth Amendment violation on this ground. And we recently expressed our skepticism about the continued vitality of the "outrageous government conduct" defense, of which these claims are thought to be a subspecies. 

Even if this deliberate-intrusion concept could form the basis of a due process claim, the Gaetanos still would not prevail. Such claims require an ongoing, personal attorney-client relationship. That's not something the Gaetanos and Goodman have. Such claims also require a deliberate intrusion. But that's not what happened. The government never requested privileged information from Goodman. Such claims also require actual and substantial prejudice. But the Gaetanos seek relief outside the context of any enforcement proceeding, and they offer no explanation why the ordinary remedy—suppressing privileged evidence—would fail to protect them. No Fifth Amendment danger lurks.

3.  The Court rejected a claim under § 7525, noting that the privilege could be raised only to prevent compelled production of privileged information, but cannot be used to stop extrajudicial communications unrelated to  proceedings before a court.

DC Court Rejects Bankers Attack on FATCA Regs (1/18/14)

In Fla. Bankers Ass'n v. United States Dep't of Treasury, 2014 U.S. Dist. LEXIS 3521 (D.D.C. 2014), here, the court sustained the IRS regulations "the regulations requir[ing] U.S. banks to report the amount of interest earned by accountholders residing in foreign countries."

The Court says in its opening:

The Bankers Associations contend, in a Motion for Summary Judgment, that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated. Because the Service reasonably concluded that the regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor — other than a tax evader — to withdraw his funds from U.S. accounts, the Court upholds the regulations and grants the Government's Cross-Motion for Summary Judgment.

In reaching this decision, the Court rejected various challenges to the regulations based on the Administrative Procedure Act, often referred to as APA, and the Regulatory Flexibility Act.  Interestingly, the Court did reject the Government's threshold argument that the suit was barred by the Anti-Injunction Act, Section 7421(a), concluding:

Although the Court owes some deference to the Government's opinion of whether or not the AIA applies, see Seven-Sky v. Holder, 661 F.3d 1, 13 (D.C. Cir. 2011), abrogated on other grounds by Nat'l Fed'n of Indep. Bus., 132 S. Ct. 2566, it must nevertheless heed the D.C. Circuit's admonition that the AIA does not bar suits like this one brought merely for "purpose of enjoining a regulatory command." Id. at 8. Indeed, the AIA "has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement," even if a tax-related penalty could follow. Id. at 9. And the regulations at issue here, like the Foodservice reporting requirement, fit that bill. As the DJA and AIA are coterminous, neither Act prevents the Bank Associations' suit.