Govig & Associates Incorporated v. United States of AmericaGovig & Associates Incorporated v. United States of America
ORDER
The Internal Revenue Service (“IRS“) has determined that Plaintiff Govig & Associates and its owners failed to disclose their participation in a “listed transaction” described in IRS Notice 2007-83. The IRS assessed tax penalties against Plaintiffs for 2015 and proposed additional penalties for 2015-2017. Plaintiffs argue that Notice 2007-83 was issued in violation of the Administrative Procedure Act (“APA“) and seek an order setting it aside, requiring the refund of a penalty paid for 2015, and declaring that the penalties proposed for 2015-2017 must be rescinded. Doc. 1.
The United States moves to dismiss for lack of subject matter jurisdiction and failure to state a claim. Doc. 23; see
I. Background.
A. Regulatory Landscape.
Federal tax collection is based on a “system of self-reporting.” United States v. Bisceglia, 420 U.S. 141, 145 (1975). There is legal compulsion to be sure, but the government largely “depends upon the good faith and integrity of each potential taxpayer to disclose honestly all information relevant to tax liability.” Id. It would be naive, however, “to ignore the reality that some persons attempt to outwit the system, and tax evaders are not readily identifiable.” Id.
Congress has authorized the IRS to establish procedures for collecting information from taxpayers. A federal statute requires taxpayers to provide information in a return or statement when IRS regulations require it.
IRS regulations say taxpayers must disclose their participation in certain “listed transactions” the agency has selected for scrutiny.
To incentivize disclosure, Congress has authorized the IRS to impose monetary penalties on those who fail to file a required statement.
Taxpayers who believe penalties have been assessed in error are often barred from challenging the assessments in federal court because the AIA prohibits most suits to restrain the assessment of taxes.
B. IRS Notice 2007-83.
One of the ways the IRS identifies listed transactions is by issuing published notices. See
C. Facts and Procedural History.
Govig & Associates (the “company“) is an executive recruiting agency owned by Plaintiffs Todd Govig and Richard and Jeanette Govig. The Govigs are participants in a Death Benefit and Restricted Property Trust implemented by the company in 2015 (the “Govig trust“). The IRS determined that the Govig trust was a listed transaction under Notice 2007-83 and that Plaintiffs failed to disclose their participation. In August 2019, the IRS assessed § 6707A penalties against Plaintiffs for 2015.
Plaintiffs paid the 2015 penalties and filed suit to have Notice 2007-83 set aside under the APA. See Doc. 1, Govig & Assocs., Inc. v. United States, No. CV-19-05185-PHX-SMB (“Govig I“). The district judge dismissed the suit for lack of subject matter jurisdiction, finding that the AIA barred it from “hearing the case as doing so would inhibit the assessment or collection of a tax assessed under
On October 15, 2020, the IRS proposed the assessment of § 6707A penalties against Plaintiffs for the years 2015-2017. Plaintiffs filed suit again in November 2020, seeking refund of the § 6707A penalties paid for 2015 under
In March 2022, the United States Court of Appeals for the Sixth Circuit found Notice 2007-83 unlawful because the IRS “did not satisfy the notice-and-comment procedures for promulgating legislative rules under the APA.” Mann Constr., Inc. v. United States, 27 F.4th 1138, 1148 (6th Cir. 2022). Plaintiffs then filed this third lawsuit in April 2022.
Plaintiffs characterize this as an action “to set aside final agency action, namely Notice 2007-83, in accordance with the [APA], and to obtain a refund pursuant
The complaint asserts five claims: (1) failure to follow notice-and-comment procedures for Notice 2007-83 in violation of the APA; (2) unauthorized agency action in violation of the APA; (3) arbitrary and capricious agency action in violation of the APA; (4) refund of the § 6707A penalty Jeanette paid for 2015; and (5) declaratory judgment and rescission for the additional penalties proposed against Plaintiffs for 2015-2017. Id. ¶¶ 47-103. The United States moves to dismiss under
II. The Effect of the Mann Decisions.
Plaintiffs claim that Notice 2007-83 was set aside nationwide by the Sixth Circuit‘s Mann decision. They argue that the “vacatur nullified the Notice” - that it “was
The Sixth Circuit did say that “[b]ecause the IRS‘s process for issuing Notice 2007-83 did not satisfy the notice-and-comment procedures for promulgating legislative rules under the APA, we must set it aside.” Mann, 27 F.4th at 1148. But the court said nothing about the scope of its ruling - whether it was setting aside the Notice for purposes of the case before it or for all purposes, everywhere.
Approximately one month after Mann was issued, the opinion‘s author, Chief Judge Jeffrey Sutton, said this in another Sixth Circuit case:
I am not the first to question nationwide (or universal) injunctions (or remedies) that bar the federal government from enforcing a law or regulation anywhere and against anyone. . . . Such injunctions create practical problems[.] The effect of them is to prevent the National Government from enforcing a rule or executive order without (potentially) having to prevail in all 94 district courts and all 12 regional courts of appeals. They incentivize forum shopping. They short-circuit the decisionmaking benefits of having different courts weigh in on vexing questions of law and allowing the best ideas to percolate to the top. . . .
The Administrative Procedure Act, it is true, says that a reviewing court may “hold unlawful and set aside” agency actions that violate the law.
5 U.S.C. § 706(2) . But that raises a question; it does not answer it. The question is whether Congress meant to upset the bedrock practice of case-by-case judgments with respect to the parties in each case or create a new and far-reaching power through this unremarkable language. . . . Use of the “setting aside” language does not seem to tell us one way or another whether to nullify illegal administrative action or not to enforce it in the case with the named litigants. For that reason, I would be inclined to stand by the long-understood view of equity - that courts issue judgments that bind the parties in each case over whom they have personal jurisdiction.
The Michigan district court judge in Mann had the same view. When the case returned to him on remand, the judge thought he needed to decide whether the Notice should be set aside nationwide. See Mann Constr., Inc. v. United States, No. 1:20-CV-11307, 2023 WL 248814, at *1-3 (E.D. Mich. Jan. 18, 2023). The judge correctly noted that this issue was “not expressly addressed by the Sixth Circuit[.]” Id. at *2.
The district judge found that the Notice should be vacated nationwide. Id. at *3. The Court does not agree with Plaintiff‘s contention, however, that his order fully extinguishes the Notice everywhere else. It appears that no party before the Michigan district court sought to have the notice set aside. The plaintiffs in that case specifically agreed that their complaint “was not intended to seek an injunction against the IRS or a declaratory judgment that would bind the IRS as to other taxpayers.” Doc. 30 at 10-11 (quoting Doc. 60 at 1, Mann Constr., Inc. v. United States, No. 2:20-cv-11032 (E.D. Mich. 2021)); see also Mann Constr., Inc. v. United States, 539 F. Supp. 3d 745, 755 (E.D. Mich. 2021) (explaining that the plaintiffs “concurred in the dismissal of any claim for injunctive or declaratory relief, so the only claim for relief remaining was for a judgment awarding damages in the amount of the 6707A penalty assessed for [tax year] 2013“). This point was made to the district judge on remand, but he concluded that the Notice should be vacated even if no party sought that relief:
The APA requires reviewing courts to “set aside” or to vacate any unlawful regulation.
5 U.S.C. § 706(2) . This vacatur requirement exists regardless of whether Plaintiffs seek it. Thus, even if Plaintiffs “forfeited” their claimfor declaratory relief, this Court may not ignore the edict of Congress: that is, that courts “shall” set aside any rule passed without notice and comment that Congress did not expressly exclude from the notice-and-comment requirements. 5 U.S.C. § 706(2) .
Id. at 3 (citation and emphasis omitted).
A decision not requested by the parties and not required to accord full relief between them is dictum. See Lions Club of Albany, California v. City of Albany, No. C 17-05236 WHA, 2022 WL 17072021, at *2 (N.D. Cal. Nov. 17, 2022) (explaining that the court‘s discussion in a prior case was “dictum [that] could not be deemed to be an order . . . because there was no one in the prior case asking for such relief“); In re Motors Liquidation Co., 619 B.R. 63, 72 (Bankr. S.D.N.Y. 2020) (“[B]ecause plaintiffs had not sought relief from the GUC Trust, any so-called ‘finding’ with respect to claims against the GUC Trust was entirely ‘unnecessary to the disposition of the case’ and was therefore dictum.“). And dictum is not binding on other courts. See Hachicho v. McAleenan, No. EDCV 19-820-VAP (KK), 2019 WL 5483414, at *7 (C.D. Cal. Oct. 18, 2019) (noting that “statements not necessary to a decision are dicta and have no binding or precedential impact“) (citing Exp. Grp. v. Reef Indus., Inc., 54 F.3d 1466, 1472 (9th Cir. 1995)); see also Advsr, LLC v. Magisto Ltd., No. 19-CV-02670-JCS, 2020 WL 978610, at *8 (N.D. Cal. Feb. 28, 2020) (“Excepting narrow doctrines of estoppel and law of the case, no district court decision binds any court (or even the issuing court) in future cases[.]“).
This Court finds that the circuit and district court decisions in Mann cannot fairly be read as having nationwide scope. As a result, the Court will not treat Notice 2007-83 as a legal nullity.
III. Rule 12(b)(1) and (6) Standards.
Federal courts have limited jurisdiction, “possess[ing] only that power authorized by Constitution and statute[.]” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). When jurisdiction is challenged in a
IV. The United States’ Motion to Dismiss.
A. The AIA and the DJA‘s Tax Exception.
The AIA and the DJA‘s tax exception are congressionally imposed limitations on the Court‘s jurisdiction. See Govig I, 2020 WL 6048301, at *3. With certain exceptions not relevant here, the AIA provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person[.]”
1. CIC Services.
In CIC Services, an advisor to taxpayers who were participating in insurance agreements known as “micro-captive transactions” sued the IRS to enjoin enforcement of IRS Notice 2016-66, which required advisors to report information about micro-captive transactions and subjected them to § 6707A penalties and potential criminal liability for noncompliance. The advisor claimed the notice violated the APA. The district court found that the advisor actually sought to restrain the IRS‘s assessment and collection of a tax and dismissed for the case for lack of jurisdiction under the AIA. CIC Servs., LLC v. IRS, No. 3:17-CV-110, 2017 WL 5015510, at *4 (E.D. Tenn. Nov. 2, 2017). The Sixth Circuit affirmed, holding that the suit sought to “restrain (and indeed eliminate)” the tax penalty by “invalidat[ing] the Notice, which is [the tax‘s] entire basis.” CIC Services, LLC v. IRS, 925 F.3d 247, 255 (6th Cir. 2019).
The Supreme Court reversed. It held that the AIA does not prohibit “a suit seeking to set aside an information-reporting requirement that is backed by both civil tax penalties and criminal penalties.” CIC Servs., 141 S. Ct. at 1586. The key issue was whether the suit was brought for the purpose of restraining the assessment or collection of a tax in violation of the AIA. Id. at 1588. The Court explained that if the “downstream” tax penalty in § 6707A did not exist, the “case would be a cinch: The [AIA] would not apply and the suit could proceed [because a] reporting requirement is not a tax[] and a
The complication arose from the fact that Notice 2016-66‘s reporting obligations “are backed by a statutory tax penalty.” Id. at 1589. The question, then, was whether that added tax penalty “mean[s] that CIC‘s suit is, as the [AIA] provides, ‘for the purpose of restraining the assessment or collection of any tax[.]‘” Id. The Supreme Court provided guidance for determining a suit‘s purpose in this context:
[W]e inquire not into a taxpayer‘s subjective motive, but into the action‘s objective aim - essentially, the relief the suit requests. . . . The purpose of a measure is “the end or aim to which [it] is directed.” And in this context, that aim is not best assessed by probing an individual taxpayer‘s innermost reasons for suing. Down that path lies too much potential for circumventing the [AIA]. Instead, this Court has looked to the face of the taxpayer‘s complaint . . . [and] “the substance of the suit” - the claims brought and injuries alleged - to determine the suit‘s object. And most especially, we have looked to the “relief requested” - the thing sought to be enjoined.
Id. at 1589-90 (citations omitted).
The advisor‘s complaint in CIC Services was brought before the IRS report was due and before any penalty had been assessed. It claimed that the IRS violated the APA by issuing Notice 2016-66 without notice-and-comment procedures and that the notice was arbitrary and capricious because it imposed new reporting requirements without proven need. See id. at 1588, 1590 (citations omitted). The relief requested was “setting aside IRS Notice 2016-66,” “enjoining the enforcement of Notice 2016-66 as an unlawful IRS rule,” and “declaring that Notice 2016-66 is unlawful.” Id. (citations and brackets omitted). The advisor argued that this request revealed the suit‘s true aim: invalidating the notice and thereby eliminating its reporting requirements. See id. at 1590. The government countered that the ultimate purpose was to stop collection of the tax itself. Id. It argued that avoiding the burdens of complying with the notice and avoiding the tax penalties for noncompliance are “two sides of the same coin.” Id.
The Court rejected the government‘s argument that “an injunction against the Notice is the same as one against the tax penalty - just ‘two sides of the same coin.‘” Id. at 1590. Three aspects of the regulatory scheme led to this rejection.
First, the Notice “levies no tax” and instead “imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty.” Id. By challenging the legality of the Notice, the advisor sought “to get out from under the (non-tax) burdens of a (non-tax) reporting obligation.” Id. at 1591. Although CIC would never have to worry about the downstream tax penalty if its suit succeeded, that was “the suit‘s after-effect, not its substance. The suit still target[ed] the reporting mandates . . . of the Notice itself.” Id.
Second, the Notice‘s reporting rule and the statutory tax penalty were several steps removed from each other. Id. As already noted, no tax penalty had been assessed.
Third, violation of the Notice was punishable not only by a civil tax but also by criminal penalties. Id. at 1591-92 (citing
2. Plaintiffs’ Suit.
In ruling on the government‘s motion, the Court must conduct its “jurisdictional analysis on a claim-by-claim basis[.]” Martinez v. Clark, 36 F.4th 1219, 1226 (9th Cir. 2022); see U.S. ex rel. Boothe v. Sun Healthcare Grp., Inc., 496 F.3d 1169, 1176 (10th Cir. 2007) (“each claim in a multi-claim complaint must be treated as if it stood alone“);
a. Count One - APA Notice and Comment Claim.
Count one alleges that the IRS violated the notice-and-comment requirements of the APA when it issued Notice 2007-83. Doc. 1 ¶¶ 47-61. It alleges that under the APA, “‘rules’ promulgated by an agency must be published in accordance with notice-and-comment procedures.” Id. ¶ 47 (citing
Count one falls within the Supreme Court‘s holding in CIC Services - it meets each of the three factors identified by the Court as distinguishing CIC Services from cases seeking to restrain the assessment and collection of a tax within the meaning of the AIA. First, count one challenges an IRS Notice that imposes “affirmative reporting obligations” and inflicts “costs separate and apart from the statutory tax penalty.” CIC Services, 141 S. Ct. at 1591. Second “the Notice‘s reporting rule and the statutory tax penalty are several steps removed from each other.” Id. As in CIC Services, no penalty had been assessed in this case against the company, Todd, or Richard when this lawsuit was filed.3 “Third, violation of the Notice is punishable not only by a tax but by separate criminal penalties.” CIC Services, 141 S. Ct. at 1592.
The United States asserted at oral argument that this conclusion will eviscerate the AIA by permitting a flood of tax-related cases. Not so. Actions permitted by CIC Services are limited to (1) lawsuits challenging an information-gathering notice that imposes affirmative reporting obligation and inflicts costs separate and apart from the statutory tax penalty, (2) when the notice and the statutory tax penalty are several steps removed from each other, and (3) when violation of the notice is punishable not only by a tax but by separate criminal penalties. 141 S. Ct. at 1591-92. This appears to be a fairly narrow group of cases.
Quoting language from CIC Services, the United States argues that Plaintiffs stand at the “cusp of tax liability” because they failed to comply with the Notice‘s reporting requirement and the IRS proposed § 6707A penalties against them. Docs. 23 at 17-18, 30 at 7 (quoting CIC Services 141 S. Ct. at 1591). But it is count five, not count one, that addresses Plaintiffs’ possible penalties and their rescission. Count one focuses solely on the IRS‘s alleged failure to follow APA procedures when it promulgated Notice. And count one was brought before any tax penalty had been assessed.
The United States notes that tax advisors like the plaintiff in CIC Services incur significant costs in complying with a notice‘s reporting requirements and those costs may be greater than any potential tax liability the taxpayer may face. Doc. 23 at 18 (citing CIC Services, 141 S. Ct. at 1594-95 (Sotomayor, J., concurring)). The government
The United States cites several cases to show that this action falls outside the holding of CIC Services. Docs. 30 at 7, 33 at 2. The cases are inapposite.
In Hancock County Land Acquisitions, LLC v. United States, No. 21-12508, 2022 WL 3449525 (11th Cir. Aug. 17, 2022), the plaintiff sought to prevent the IRS from issuing a deficiency notice alleging that the plaintiff had improperly claimed a $180 million deduction on its 2016 return, resulting in an underpayment of taxes. 2022 WL 3449525, at *2. The Eleventh Circuit found that because the relief sought “would restrain the IRS from assessing and collecting those taxes, it [was] barred by the AIA.” Id. The Eleventh Circuit emphasized that, “[u]nlike in CIC Services, the ‘legal rule at
In Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), the IRS had obtained information on the plaintiff‘s virtual currency accounts through a third-party summons. 46 F.4th at 2-4. The plaintiff sought injunctive relief requiring the IRS to expunge that information from its records. Id. at 5. Relying on CIC Services, the First Circuit held that the AIA did not bar the claim because it targeted “the IRS‘s continued retention of [the plaintiff‘s] personal financial information” as opposed to a tax. Id. at 8. Harper undermines Plaintiffs’ position, the United States contends, because Plaintiffs “face a specific proposed tax assessment and plainly seek to restrain that assessment and collection on it.” Doc. 30 at 7. But count one asserts an APA procedural challenge to the Notice 2007-83. It does not address any tax penalties or their rescission.
The United States’ citation to Franklin v. United States, 49 F.4th 429 (5th Cir. 2022), is also not helpful. Doc. 33 at 2. The plaintiff in that case did not challenge a standalone reporting requirement like Notice 2007-83. He instead challenged the IRS‘s assessment of tax penalties based on an alleged procedural failure under
The United States’ citation to Silver v. IRS, No. CV 20-1544 (CKK), 2022 WL 16744921 (D.D.C. Nov. 7, 2022), is unhelpful as well. Doc. 33 at 2. The case challenged regulations effecting the 2017 Tax Cuts and Jobs Act, which changed the tax rate that a shareholder pays on the earnings of a foreign corporation if those earnings are repatriated
Finally, the government argues that the possible imposition of misdemeanor criminal liability for violation of Notice 2007-83 does not bring this case within the holding of CIC Services because Plaintiffs in this case, unlike the plaintiff in CIC Services, have already violated the Notice and therefore already face criminal liability. Doc. 23 at 19. The government also argues that Plaintiffs fail to allege an imminent risk of criminal prosecution. Id. at 19 n.5. But potential criminal penalties were relevant in CIC Services because they necessitated bringing a pre-enforcement case to set aside the allegedly unlawful notice. The usual route for contesting taxes would not protect the plaintiff from criminal liability. The plaintiff would have to disobey the reporting requirement, suffer the imposition of a penalty, pay the penalty under protest, and then file suit for refund of the penalty. This procedure might set up a tax refund claim, but it would not protect the plaintiff from criminal liability for violating the notice. CIC Services, 141 S. Ct. at 1592 & n.3. “So the criminal penalties here practically necessitate a pre-enforcement, rather than a refund, suit[.]” Id. at 1592. And the Supreme Court did not say that criminal prosecution must be imminent before an APA challenge can be brought.
b. Count Two - APA Unauthorized Agency Action Claim.
The Court reaches the same conclusion with respect to count two. Doc. 1 ¶¶ 65-80. This count also focuses solely on the validity of Notice 2007-83. It asserts that the IRS acted without authorization when it issued Notice 2007-83 because the notice fails to describe the listed transactions with the specificity required by
Because count two challenges only Notice 2007-83 and its reporting requirement, the count is not barred by the AIA or the DJA. As CIC Services held, “[a] reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax‘s assessment or collection.” 141 S. Ct. at 1588-89; see also Harper, 46 F.4th at 8 (“Because appellant‘s suit challenges the IRS‘s information-gathering authority and the [AIA] limits our jurisdiction only in suits involving assessment and collection, the [AIA] is not an applicable exception to the United States’ waiver of sovereign immunity in
c. Count Three - APA Arbitrary and Capricious Claim.
The same holds true for count three. Doc. 1 ¶¶ 81-88. The count alleges that the IRS acted arbitrarily and capriciously when it issued Notice 2007-83 because it failed to provide adequate reasons for the Notice and failed to permit public comment. Doc. 1 ¶¶ 84-85. The APA permits a court to set aside agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law[.]”
d. Count Four - Jeanette‘s Refund Claim.
Count four alleges that Jeanette is entitled to a refund of the $29,111.26 tax penalty she paid for 2015 based on the stipulated judgment in Govig II and her administrative request for a refund through the filing of Form 843 in March 2021. Id.
The United States argues that count four is moot because the IRS has granted Jeanette‘s administrative refund claim. Docs. 23 at 14, 30 at 12. It asserts that the IRS granted her request for a refund of the 2015 penalty in September 2022, and then immediately credited that amount to a 2016 penalty it recently assessed against her. No funds were returned to Jeanette. Doc. 33 at 2
The United States does not explain how the Court can dispose of count four on a motion to dismiss which is confined to analysis of the pleadings, and cites no legal authority to show that the processing of the claim renders Jeanette‘s APA challenges to Notice 2007-83 moot. See id.; see also Hooks for & on Behalf of NLRB v. Nexstar Broad., Inc., 54 F.4th 1101, 1112 (9th Cir. 2022) (applying the “exception to mootness for disputes that are ‘capable of repetition, yet evading review‘“). In addition, Plaintiffs made clear in oral argument that (1) they dispute the admissibility of the unauthenticated notice provided by the government to show the refund, (2) Jeanette‘s 2016 assessment (which apparently came after the 2015 refund was processed) does not say that the 2015 penalty has been applied to 2016, and (3) accrued interest and other issues might need to be resolved as part of count four. Given these factual complexities, the Court cannot find at this stage that count four is fully moot.
What is more, because Jeanette asserts a procedurally sound refund claim, she remains able to challenge the legality of Notice 2007-83 in counts one through three. Those challenges are not barred by the AIA or the DJA. See CIC Services, 141 S. Ct. at 1588 (“CIC could contest the legality of the reporting rules . . . by violating them and suing for a refund of a later tax penalty“); Bob Jones Univ. v. Simon, 416 U.S. 725, 746 (1974) (refund suits offer taxpayers a full opportunity to litigate the legality of IRS
e. Count Five - DJA Claim for Rescission of Tax Penalties.
Count five alleges that because Notice 2007-83 was promulgated in violation of the APA, the IRS “continues to act unlawfully by its failure and/or refusal to rescind penalties assessed against Plaintiffs in 2015-2017.” Doc. 1 ¶¶ 99-100. The count seeks to have the tax penalties rescinded and asks for “a declaratory judgment providing for this specific remedy.” Id. ¶ 103; see id. at 15 (requesting an order requiring the IRS to “rescind the § 6707A penalties assessed on Plaintiffs in 2020 with respect to Tax Years 2015-2017“).
Because count five specifically seeks to prevent the IRS from assessing and collecting tax penalties, it is barred by the AIA and DJA.
Plaintiffs contend that there are no grounds to dismiss count five because the “Sixth Circuit‘s vacatur of Notice 2007-83 applies to all regulated parties - not just the plaintiffs in Mann.” Doc. 27 at 5-6. The Court has rejected this argument above. Nor do
Plaintiffs further contend that the Williams Packing exception to the AIA applies. Doc. 27 at 9-10 (citing Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1 (1962)). Under this narrow exception, the AIA does not bar a tax suit “if it is clear that under no circumstances could the [g]overnment ultimately prevail . . . [and] if equity jurisdiction otherwise exists.” Williams Packing, 370 U.S. at 7; see Stonecipher v. Bray, 653 F.2d 398, 401 (9th Cir. 1981) (setting forth the exception‘s two-part test). “‘Only if it is . . . manifest, under the most liberal view of the law and the facts, that the government cannot [prevail]’ is the first part of the test satisfied.” Church of Scientology of Cal. v. United States, 920 F.2d 1481, 1486 (9th Cir. 1990) (citation omitted). The burden of showing that the government‘s position is baseless is on the taxpayers. Id.
Plaintiffs have not met their burden. They argue that the United States cannot prevail because Notice 2007-83 “no longer exists” after Mann. Doc. 27 at 6, 9. The Court has not accepted this assertion.
Because Plaintiffs have not shown that the United States has no chance of prevailing, the Williams Packing exception does not apply and count five must be dismissed under the AIA. See 370 U.S. at 7-8. The Court need not address the second part of the Williams Packing test - whether “equity jurisdiction otherwise exists.” Id. at 7.6
B. Issue Preclusion.
The United States contends that issue preclusion bars Plaintiffs’ APA claims because the district court in Govig I dismissed identical claims. Doc. 23 at 25. But even when the elements of issue preclusion are met, an exception applies “if there has been an
Plaintiffs contend that the Supreme Court‘s decision in CIC Services constitutes an intervening change in the law. Doc. 27 at 13-14. The Court agrees.
Before CIC Services, the Supreme Court embraced a broad and straightforward rule for determining whether a suit is barred by the AIA. See Bob Jones, 416 U.S. 725; Alexander v. “Americans United” Inc., 416 U.S. 752 (1974). The AIA barred any suit that would “necessarily preclude” the assessment or collection of a tax. Bob Jones, 416 U.S. at 732; see Americans United, 416 U.S. at 760-61. Bob Jones and Americans United instructed courts to look to the effect of a suit. If the suit would prevent the assessment or collection of a tax, it was barred.
The Sixth Circuit applied this test in holding that CIC‘s suit was barred by the AIA. See 925 F.3d at 256. In reversing that decision, the Supreme Court essentially “carve[d] out a new exception to Americans United and Bob Jones for pre-enforcement suits challenging regulations backed by tax penalties.” 141 S. Ct. at 1595 (Kavanaugh, J., concurring). The Court decided “to narrow Americans United and Bob Jones because the broad ‘effects’ rule articulated in those decisions is hard to square with the text of the [AIA], which bars only a pre-enforcement ‘suit for the purpose of restraining the assessment or collection of any tax.‘” Id.
Govig I held that the AIA barred Plaintiffs’ claims “because the ultimate effect of [the] action [was] to restrain the assessment of a penalty under § 6707A(b)[.]” 2020 WL 6048301, at *4 (emphasis added). This Court reaches a different conclusion in light of CIC Services. Because CIC Services constitutes an intervening change in the law, the United States’ issue preclusion argument lacks merit.
C. Jurisdiction Under the APA.
Plaintiffs allege that the Court has subject matter jurisdiction pursuant to the APA,
The United States also contends that Plaintiffs cannot bring claims under the APA because a refund suit under
Nor does the government explain how a refund suit by Plaintiffs would be an adequate legal remedy for potential criminal liability. Before September 2022, when the
D. Statute of Limitations.
1. The Six-Year Limitations Period.
According to
In the Ninth Circuit, two basic accrual rules exist for APA claims.
First, if a claim challenges the procedures the agency used in issuing a rule or the policy behind the rule, the claim accrues when the rule is issued. See Sierra Club v. Penfold, 857 F.2d 1307, 1316 (9th Cir. 1988) (“Sierra Club . . . [asserts] a challenge to the procedural deficiencies in adoption of the regulations in October of 1987. More than six years elapsed between the time the alleged procedural deficiencies occurred and the time of Sierra Club‘s . . . complaint. Under § 2401(a), the procedural challenge to the Notice regulations [is] time-barred.“); Shiny Rock Mining Corp. v. United States, 906 F.2d 1362, 1365-66 (9th Cir. 1990) (explaining that Penfold “declined to adopt a rule
A plaintiff cannot extend the limitations period by arguing that its procedural or policy challenge accrued when the agency applied the rule to the plaintiff. Id. at 1366 (“Shiny Rock cannot recommence the statutory period by filing [a mining] application in conflict with the [BLM‘s land] withdrawal more than six years after publication in the Federal Register“); see also Cal. Sea Urchin Comm‘n v. Bean, 828 F.3d 1046, 1050 (9th Cir. 2016) (“Our cases on this topic determine the timeliness of APA challenges according to when the applicable agency action was taken. We have held that a statute of limitations may run against a plaintiff even if it is not injured until more than six years after the relevant agency action became final.“) (citing Shiny Rock, 906 F.2d at 1363).
In Wind River Mining Corp. v. United States, 946 F.2d 710 (9th Cir. 1991), the Ninth Circuit provided the following explanation for this rule:
If a person wishes to challenge a mere procedural violation in the adoption of a regulation or other agency action, the challenge must be brought within six years of the decision. Similarly, if the person wishes to bring a policy-based facial challenge to the government‘s decision, that too must be brought within six years of the decision. This result, even if not dictated by Penfold and Shiny Rock, would make the most sense. The grounds for such challenges will usually be apparent to any interested citizen within a six-year period following promulgation of the decision.
Second, a plaintiff may challenge the substance of an agency rule as exceeding statutory or constitutional authority by bringing an APA claim within six years of the agency‘s application of the rule to the plaintiff. See id. at 715-16 (noting that “[s]uch challenges, by their nature, will often require a more ‘interested’ person than generally will be found in the public at large“); Cal. Sea Urchin, 828 F.3d at 1051 (explaining that because the plaintiff in Wind River “alleged that the BLM‘s 1979 rule . . . violated its statutory authority, we recognized that subsequent final agency actions applying the 1979 rule would also allegedly exceed the agency‘s statutory authority“) (citation omitted).
The Court agrees with the United States that the APA claims asserted in counts one and three are procedural challenges to Notice 2007-83. These counts are barred by
Count one alleges that the Court may set aside an agency rule issued without “observance of procedure” required by law, that agency rules must be published in accordance with “notice-and-comment procedures,” and that the IRS failed to comply with those procedures in issuing Notice 2007-83. Doc. 1 ¶¶ 49-50, 56 (citing
Count three also asserts a procedural defect. It alleges that the IRS‘s actions in issuing the Notice were arbitrary and capricious because the IRS failed to permit public comment and did not provide adequate reasons for issuing the Notice. Doc. 1 ¶¶ 82-86 (citing
Count two, in contrast, asserts a substantive challenge. Such a challenge “is based on grounds that [the agency‘s rule] exceeds statutory authorization, or that its authorizing legislation is unconstitutional.” Utu Gwaitu Paiute Tribe, 766 F. Supp. at 844; see Wind River, 946 F.2d at 715. Count two alleges that while § 6707A authorizes the IRS to identify listed transactions, such transactions “must be specifically identified.” Doc. 1 ¶ 68. It claims that Notice 2007-83 does not describe the elements of the listed transaction or their claimed tax benefits “with the requisite specificity.” Id. ¶¶ 69-70. This is a challenge to the substance of the Notice - an argument that its language is too vague to provide fair notice to taxpayers and to satisfy statutory requirements. Plaintiffs ask the Court to set aside the Notice under
The United States contends that count two is a facial challenge to the Notice, not an “as-applied” claim. Docs. 23 at 28-29, 30 at 15-16. But substantive challenges can be “both ‘facial’ and ‘as applied’ attacks.” Utu Gwaitu Paiute Tribe, 766 F. Supp. at 844; see also Cal. Sea Urchin, 828 F.3d at 1050 (“Though FWS characterizes Plaintiffs’ complaint as a ‘facial’ challenge to FWS‘s authority to cancel the translocation program, that argument goes to the merits of Plaintiffs’ underlying action. It does not make Plaintiffs’ 2013 challenge to FWS‘s 2012 agency action untimely.“)7
2. Equitable Tolling.
Plaintiffs contend that the AIA prevented them from challenging Notice 2007-83 before CIC Services was decided in 2020 and they therefore are entitled to equitable tolling of the limitations period. Doc. 27 at 27 at 14-17. The party “seeking equitable tolling bears the burden of establishing two elements: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstances stood in his way.” Pace v. DiGuglielmo, 544 U.S. 408, 418 (2005). Plaintiffs have not met their burden with respect to the first element.
As explained in Wind River, the grounds for procedural challenges to an agency decision “will usually be apparent to any interested citizen within a six-year period following promulgation of the decision[.]” 946 F.2d at 715. Actual knowledge of the
Plaintiffs did not need to have a trust involving cash value life insurance policies “to discover procedural errors in the adoption of [Notice 2007-83].” Wind River, 946 F.2d at 715. And yet they did not bring their procedural challenges to Notice 2007-83 until September 2019 - nearly twelve years after the Notice was issued and six years after the limitations period had expired. See Govig I, Doc. 1 ¶¶ 112-38 (APA claims asserting that the IRS failed to provide notice-and-comment procedures and adequate reasons for the Notice). Because Plaintiffs did not diligently pursue their procedural challenges to Notice 2007-83, they are not entitled to equitable tolling with respect to counts one and three. See Doc. 30 at 13; Wind River, 946 F.2d at 715 (“The government‘s interest in finality outweighs a late-comer‘s desire to protest the agency‘s action as a matter of policy or procedure.“); see also Miranda v. Castro, 292 F.3d 1063, 1066 (9th Cir. 2002) (explaining that equitable tolling is “unavailable in most cases” because the “threshold necessary to trigger equitable tolling is very high“).
The government notes that a “statute of limitations may run against a plaintiff even if it is not injured until more than six years after the relevant agency action became final.” Doc. 23 at 30 (quoting Cal. Sea Urchin, 828 F.3d at 1050). Plaintiffs assert that this quote merely explains the Ninth Circuit‘s “outdated” decision in Shiny Rock. Doc. 27 at 16. But while California Sea Urchin found that the plaintiffs’ claims were more analogous to Wind River than Shiny Rock, nothing in the decision suggested that Shiny Rock is no longer good law. See 828 F.3d at 1050-52.8
- The United States’ motion to dismiss (Doc. 23) is granted with respect to counts one, three, and five, and denied with respect to counts two and four.
- The United States’ motion for leave to respond or strike (Doc. 32) is denied.
- The Court will set a case management conference by separate order.
Dated this 22nd day of March, 2023.
David G. Campbell
Senior United States District Judge