Heavy on the “Mayo,” But No Hot Sauce

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CIC Services avoided anti-administrative rhetoric while securing the check of judicial review on the IRS.

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In CIC Services v. Internal Revenue Service, a unanimous U.S. Supreme Court held that the Anti-Injunction Act did not bar the plaintiff from bringing a facial, pre-enforcement challenge to an IRS regulation mandating that taxpayers and their material advisors report information concerning micro-captive insurance agreements.

Asleep already? You should not be.

CIC Services is not—or not just—a case about regulating tax shelters. Rather, it is a case that reaffirmed the breadth of core commitments of administrative law—commitments that extend well beyond the arena of tax regulation. And it did so without any of the justices voicing the sort of “anti-administrativist” rhetoric that has characterized several other Roberts Court administrative law decisions.

This case arose when the Internal Revenue Service (IRS) issued a notice designating micro-captive insurance agreements as “reportable transactions” and imposed reporting requirements both upon taxpayers engaged in such transactions and upon their tax advisors. CIC—a firm that helps taxpayers engage in micro-captive insurance agreements—contended that the IRS violated the Administrative Procedure Act because its decision was not issued after notice-and-comment rulemaking. CIC also argued that the IRS notice was arbitrary and capricious. But if CIC prevailed and the notice was invalidated, the IRS would not be able to collect tax penalties for noncompliance with the notice’s reporting requirements. The lower courts therefore held that the suit was barred by the Anti-Injunction Act, which strips courts of jurisdiction over any suit “for the purpose of restraining the assessment or collection of any tax.”

The Supreme Court, however, unanimously reversed, holding that the suit’s purpose was to challenge “a regulatory mandate—a reporting requirement—separate from any tax.” Because CIC’s suit targeted “the upstream reporting mandate, not the downstream tax” penalty, the Court held that CIC’s suit could proceed.

The decision in CIC Services is notable for several reasons, some of which I have elsewhere canvassed. One is that—as law professor Kristin Hickman of the University of Minnesota notes—the decision lands “another blow to tax exceptionalism.” A decade ago, the Court held in Mayo Foundation for Medical Education and Research v. United States that the same deferential standard of review that applied to other agencies, known as Chevron deference, would also apply to regulations issued by the U.S. Department of Treasury. Because Mayo arose in the context of a tax refund suit, that decision did not address whether tax regulations would be subject to Abbott Labs-style facial, pre-enforcement challenges of the sort brought by CIC notwithstanding the barrier to judicial review posed by the Anti-Injunction Act. At least one federal circuit court had previously held that the Anti-Injunction Act created “a narrow exception to the general administrative law principle that pre-enforcement review of agency regulations is available in federal court.” In CIC Services, however, the Court rejected that logic, holding that an Abbott Labs-style challenge to a stand-alone IRS regulatory mandate could proceed even though violating that mandate would incur penalties designated as “taxes.”

Taking Mayo and CIC Services together, the Court has now made clear that the IRS must take the bitter (Abbott Labs-style facial challenges) with the sweet (Chevron deference).

Equally interesting is what was absent from the CIC Services decision. The IRS has broad authority to identify transactions with the potential for tax abuse. More specifically, the Treasury Secretary may designate as reportable any transaction that has the “potential for tax avoidance or evasion,” and the relevant statute specifies no criteria for making that determination. Pursuant to that delegated authority, the IRS issued the notice in dispute in CIC Services. And willful noncompliance with the notice triggers not just steep monetary penalties, but criminal consequences of up to one year in prison.

Just three years ago, in Gundy v. United States, the Court addressed an analogous regulatory setup. The Sex Offender Registration and Notification Act (SORNA), the statute at issue in Gundy, allowed the U.S. Attorney General to “specify the applicability” of SORNA’s registration requirement to people convicted of sex offenses before the date of SORNA’s enactment. Pursuant to that delegated authority, the Attorney General issued a regulation covering pre-SORNA sex offenders. Noncompliance with the registration requirements triggered criminal consequences of up to 10 years in prison.

A four-Justice plurality, with a fifth vote supplied by an unhappy Justice Samuel Alito who concurred in the judgment, deflected a nondelegation challenge to that statute by construing the statute to require that the Attorney General apply the registration requirements to “pre-Act offenders as soon as feasible.” In the plurality’s view, sustaining the constitutionality of the SORNA delegation was essential to sustaining the administrative state: “If SORNA’s delegation is unconstitutional, then most of Government is unconstitutional—dependent as Congress is on the need to give discretion to executive officials to implement its programs.”

Gundy prompted an impassioned dissent from Justice Neil Gorsuch, joined by Chief Justice John Roberts and Justice Clarence Thomas. Decrying the long “quiescence” of the nondelegation doctrine, Justice Gorsuch contended that SORNA gave the Attorney General “unfettered discretion” rather than confining it to “deciding the factual predicates to a rule set forth by statute.” In Justice Gorsuch’s view, SORNA left the Attorney General with an unconstitutional degree of power—“the power to write his own criminal code.”

In the wake of Gundy, it would not have been surprising to see Justice Gorsuch—or one of the other two justices that joined his dissent—lodge a similar protest in CIC Services. The fundamental structure of SORNA does not differ so very much from the regulatory scheme at issue in CIC Services. As noted above, the Treasury Secretary has the authority to decide if a transaction has “a potential for tax avoidance or evasion.” That is a delegation that would appear to fall short of the more exacting standard that Justice Gorsuch’s Gundy dissent endorsed. His Gundy dissent, for instance, maintained that “as soon as feasible” was an “evasive standard,” because “feasible” can have many meanings. The terms “potential,” “tax avoidance,” and “tax evasion” are similarly ambiguous.

Gorsuch’s Gundy dissent also disapprovingly cited a 1948 case sustaining a statute that gave the executive branch the power to recover excessive profits from government contractors, describing it as a decision in which the “mutated version of the intelligible principle remark” began to take hold. But if an instruction to determine what qualifies as excessive profits leaves too much fact-finding latitude for the executive branch, then it is hard to see why the same would not be true for the delegation underlying the IRS notice at issue in CIC Services. The naked phrase “having a potential for tax avoidance or evasion” is not any less evasive, nor does it pronounce a standard discernibly more intelligible, than the delegations that the Gundy dissent evidently regarded as inadequate.

Moreover, the parallels between the IRS reportable-transaction regulatory regime and SORNA extend to the potential consequences for those regulated. In both situations, a regulatory decision by the executive branch imposes on a vast set of private parties an obligation—either to register or to report—and disobedience triggers criminal sanctions specified by statute.

All in all, the IRS reportable-transaction regulatory scheme, in a fashion not obviously different than SORNA’s, allows the executive branch to expose private parties to criminal penalties through issuing a regulation pursuant to a loosely worded delegation. Yet nothing about this arrangement seems to have drawn the ire of any of the justices.

It is worth stressing that concerns about delegation did loom in the backdrop of this decision, although they made no appearance in it. In dissenting from denial of rehearing en banc by the circuit court, Judge Amul Thapar stated that the IRS “exercises the power to tax and to destroy, in ways that the Founders never would have envisioned.” Another circuit court judge accused Judge Thapar of trying to “inflict death by distorted originalism on the modern administrative state.” A similar note was struck at oral argument when Justice Gorsuch alluded to “the growing power of administrative agencies over the national economy” and noted that the IRS “regulates enormous swaths of the national economy.” Yet Justice Gorsuch chose not to revisit his constitutional arguments against “the growing power of administrative agencies” in CIC Services, instead joining the Court’s opinion in full and otherwise keeping his peace.

Judges—including Justice Gorsuch—sometimes choose to voice constitutional doubts or broadsides in separate writings, even when doing so is, strictly speaking, wholly unnecessary for the task of deciding the cases before them. But they are of course under no obligation to air their views in that way. So court watchers should not read too much into this silence concerning nondelegation for the longer term.

For now, however, it is worth noticing that CIC Services offered a refreshing instance of a unanimous Court deciding an important administrative law case without any of the heated rhetoric concerning “administrative absolutism” in which some recent opinions have partaken.

Mila Sohoni

Mila Sohoni is the Associate Dean of Faculty and professor of law at the University of San Diego School of Law.

This essay is part of a nine-part series, entitled The Supreme Court’s 2020-2021 Regulatory Term.