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Divided Appellate Court rejects pre-enforcement challenge to nonresident alien reporting regs

Florida Bankers Association v. Dept. of Treas., (CA Dist Col 08/14/2015) 116 AFTR 2d ¶2015-5143

The Court of Appeals for the District of Columbia Circuit, vacating the district court, has held that the Anti-Injunction Act (AIA) bars a lawsuit brought by two banking associations challenging regs that require U.S. banks to report to IRS the amount of interest paid to certain nonresidents. The majority, over a strong dissent, found that the challenge concerned a penalty that is treated as a tax for AIA purposes and that the suit was thus barred by the AIA.

Background. IRS issued T.D. 9584 in 2012, which carries income-reporting requirements aimed at “detecting and deterring tax cheats at home and abroad.” It requires the reporting of interest paid to nonresident alien (NRA) individual residents of countries with which the U.S. has in effect an information exchange agreement under which the U.S. agrees to provide as well as receive information and under which the competent authority is the Secretary of the Treasury or his delegate. (See Weekly Alert ¶  11  04/19/2012.) The reporting requirements are in Reg. § 1.6049-4 and Reg. § 1.6049-8. The penalty for failure to report is in Code Sec. 6721(a), which, under Code Sec. 6671, is to be treated as a tax for purposes of the AIA.

The AIA says that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” (Code Sec. 7421(a)) Among other things, the AIA generally bars pre-enforcement challenges to certain tax statutes and regs, requiring plaintiffs to instead raise such challenges in refund suits after the tax has been paid or in deficiency proceedings—thereby “protect[ing] the Government’s ability to collect a consistent stream of revenue.” (National Federation of Independent Business (NFIB) v. Sebelius, (Sup Ct 2012) 109 AFTR 2d 2012-2563109 AFTR 2d 2012-2563)

The Administrative Procedure Act (APA) requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.” (5 U.S.C. § 706(2)(A), (E))

The Regulatory Flexibility Act (RFA) requires agencies to either analyze a proposed rule’s impact on small businesses or to certify that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities. (5 U.S.C. §§ 603–605(b))

Facts. The Florida Bankers Association and the Texas Bankers Association (collectively, the plaintiffs) are two organizations that advocate for large and small banks in their respective states. Together, they represent over 800 banks.

The plaintiffs challenged the reporting requirements as violating the APA and RFA. They argued that the requirements will cause far more harm to banks than anticipated.

IRS, in turn, challenged whether the plaintiffs had standing to bring these claims and, if so, whether the claims were barred by the AIA. The plaintiffs and IRS both filed motions for summary judgment.

District court decision. The court granted IRS’s motion for summary judgment, finding that while the plaintiffs had standing to bring their claims and weren’t barred by the AIA, they ultimately failed to establish any APA or RFA violation. The court generally rejected the plaintiffs’ assertion that the requirements would cause a “capital flight” (i.e., that NRAs would withdraw funds en masse in response to the requirements) and found that IRS reasonably concluded that the requirements would improve U.S. tax compliance while imposing only a minimum reporting burden on banks. (Florida Bankers Assn., et al, v. U.S. Dept. of Treas., (DC Dist Col 01/13/2014) 113 AFTR 2d 2014-498113 AFTR 2d 2014-498; see Weekly Alert ¶  33  1/23/2014 for more details.)

DC Circuit vacates. The majority opinion for the Court of Appeals for the District of Columbia Circuit (DC Circuit) concluded that the plaintiffs’ challenge was barred by the AIA. It determined that the regulatory requirements at issue were enforced by a penalty that was, under Code Sec. 6671, treated as a tax, and that if the plaintiffs’ suit were to succeed, such would prevent collection of the tax itself by effectively negating it. Put otherwise, if the reporting requirements were struck down, the penalty/tax for failure to report would never be paid by any taxpayer, and the majority found that this brought it within the scope of the AIA.

In this case, a successful challenge to the reporting requirements would effectively negate the Code Sec. 6721 penalty. The Court held that the suit was barred by the AIA, but it emphasized that the plaintiffs would be free to sue at a later time (i.e., not comply with the requirement, pay the penalty, then sue for refund).

The Court further stated that its logic is supported by the Supreme Court’s NFIB decision, above, where the Supreme Court said that the AIA would have applied in that case if the penalty at issue was treated as a tax under Code Sec. 6671(a).

The plaintiffs also argued that their suit fell outside the AIA because they weren’t seeking to restrain assessment or collection, but rather sought “relief from a regulatory mandate that exists separate and apart from the assessment or collection of taxes.” However, the DC Circuit rejected this attempt to avoid the AIA, citing a series of Supreme Court cases involving challenges to “regulatory aspects” of a tax. The DC Circuit again cited the NFIB decision, noting that while the Supreme Court held that the AIA didn’t apply in that case for other reasons, it “vigorously disputed” the argument in that case that the AIA didn’t apply because the plaintiffs in that case were challenging the underlying statutory predicate to the penalty rather than the penalty itself.

Accordingly, the Court vacated the district court decision and remanded with directions to dismiss it on AIA-based grounds.

Dissent. The dissenting opinion found that the AIA does not apply in this case, stating that “precedent makes plain that neither a pre-enforcement challenge to a tax-reporting requirement nor a pre-enforcement challenge to a regulation enforced by a tax penalty is barred by the AIA.” However, the dissent declined to decide the merits of the underlying challenge to the reporting requirements themselves.

Examining the language of the AIA, which, subject to exception, states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person,” the dissent concluded that the AIA doesn’t apply unless a plaintiff “seeks to stop the technical processes of assessment or collection”—which wasn’t the case here. Just because a successful challenge to the reporting requirements would have the effect of no taxpayer even paying the Code Sec. 6721 penalty doesn’t bring the challenge within the AIA’s scope.

References: For reporting interest to nonresident alien individuals, see FTC 2d/FIN ¶  S-3012.3  ; United States Tax Reporter ¶  60,494.05  ; TaxDesk ¶  811,517  ; TG ¶  60106  .

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