Tax Litigation Update: DC Circuit Rejects IRS’s Broad Interpretation of Anti-Injunction Act
July 22nd, 2015
On June 19, 2015, the United States Court of Appeals for the District of Columbia Circuit held that a nonprofit organization was not barred by the Anti-Injunction Act from bringing suit against the IRS because it had no other remedy for its alleged injury. In Z Street v. John Koskinen, available here, the IRS argued that the Anti-Injunction Act prohibits any suit aiming to “restrain the assessment or collection of any tax,” but the Court rejected the IRS’s overly broad view. Here, where a nonprofit organization claimed its application for a 501(c)(3) tax exemption was being delayed by the IRS on the basis of the organization’s political views, the Court held that because there was no other statutory procedure available, the nonprofit’s suit could move forward.
Z Street is a nonprofit organization “devoted to educating the public about Zionism” and “the facts relating to the Middle East.” As such, Z Street applied for a section 501(c)(3) tax exemption. However, during its application process, a conversation between Z Street’s lawyer and an IRS agent revealed the agency’s alleged “Israel Special Policy,” which results in “increased scrutiny[y]” for applications from organizations holding “political views inconsistent with those espoused by the Obama ministration.” Z Street claimed it fell under this policy and consequently experienced an unreasonable delay in the processing of its application as compared to organizations with other political views.
Z Street sued the IRS under the Declaratory Judgment Act, 28 U.S.C. § 2201, claiming that the “Israel Special Policy” violated the First Amendment through blatant viewpoint discrimination. The relief Z Street sought was a declaration to that effect, and an injunction barring the IRS from applying its “Israel Special Policy” to Z Street’s pending application, instead requiring the IRS to adjudicate the application “expeditiously and fairly.”
The IRS moved to dismiss for lack of subject-matter jurisdiction and failure to state a claim, arguing that Z Street’s suit was barred by the Anti-Injunction Act, which prohibits suits to “restrain the assessment or collection of any tax,” and the doctrine of sovereign immunity. The IRS further argued that the plaintiff had other remedies at law available, and disputed the existence of the “Israel Special Policy.” However, at the motion to dismiss stage, the District Court was required to assume the truth of all material factual allegations in the complaint, and therefore assumed that the IRS did in fact have an “Israel Special Policy” that delayed the processing of section 501(c)(3) applications.
The District Court denied the IRS’s motion to dismiss, writing that Z Street’s First Amendment claim “cannot be properly characterized as a lawsuit implicating the ‘assessment or collection’ of taxes” because Z Street was only seeking a constitutionally valid process without delay. It also held that the claim for injunctive relief was appropriate because no other remedy at law would cure Z Street’s injury. The District Court then certified an order for interlocutory appeal to the D.C. Circuit.
Proper Scope of the Anti-Injunction Act
The D.C. Circuit began its analysis by summarizing the cases that best describe the purpose of the Anti-Injunction Act. In short, the D.C. Circuit came up with four principles presented through case law:
- Outside of certain statutorily authorized actions, like those brought pursuant to 26 U.S.C. § 7428, the Anti-Injunction Act bars suits to litigate an organization’s tax status.
The two primary cases the Court cited as support for this proposition were Bob Jones University v. Simon, 416 U.S. 725 (1974), available here, and Alexander v. “Americans United” Inc., 416 U.S. 752 (1974), available here. In Bob Jones, the IRS moved to withdraw Bob Jones’ section 501(c)(3) status because it refused to admit African-American students, and the University sued to maintain its exemption. In “Americans United,” a non-profit group challenged its reclassification from a section 501(c)(3) to a section 501 (c)(4) organization due to its lobbying activities. In both cases, the Supreme Court found that the Anti-Injunction Act barred the suits, because “prior to the assessment and collection of any tax, a court may [not] enjoin the Service from revoking [tax exempt status],” as written in the Bob Jones opinion.
- The Anti-Injunction Act does not apply in situations where the plaintiff has no alternative means to challenge the IRS’s action.
In South Carolina v. Regan, 465 U.S. 367 (1984), available here, the state challenged an amendment to the Internal Revenue Code that altered the taxation of certain state-issued bonds. South Carolina paid no taxes, and therefore it was unable to utilize any statutory procedure to contest the constitutionality of the tax. Here, the Court held South Carolina’s suit was not barred by the Anti-Injunction Act, because Congress did not intend the Anti-Injunction Act to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy.
- The Anti-Injunction Act does not apply in situations where the plaintiff has no “implication[s]” for tax assessment or collection.
The D.C. Circuit considered the Anti-Injunction Act in a different light in Cohen v. United States,650 F.3d 717 (D.C. Cir. 2011) (en banc), available here. There, taxpayers challenged a special procedure the IRS had established for refunding an unlawfully collected tax. The Court rejected the government’s argument that the case was barred by the Anti-Injunction Act because it held that the case did not involve the “assessment or collection” of taxes because “[t]he IRS previously assessed and collected the excise tax at issue” and the U.S. Treasury already received the money. Therefore, the Court held that the Anti-Injunction Act is not an obstacle to other claims seeking to enjoin the IRS outside the assessment and collection of tax.
- In administering the tax code, the IRS may not discriminate on the basis of viewpoint.
Finally, the last series of cases cited by the D.C. Circuit in explaining the scope of the Anti-Injunction Act demonstrated that there is a requirement for viewpoint neutrality in the government’s provision of financial benefits, rather than having the tax code “discriminate invidiously … in such ways as to aim at the suppression of dangerous ideas;” see e.g. Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), available here.
Applying the Anti-Injunction Act Propositions
The D.C. Circuit in this case disagreed with the positions articulated by the IRS and Z Street. On the one hand, the D.C. Circuit rejected the IRS’s broad approach that this was more in line with Bob Jones/“Americans United.” On the other, the Court disagreed with Z Street’s argument that it was in line with Cohen. The Court reasoned that Bob Jones and “Americans United” were different because in those cases the plaintiffs sought to litigate their tax status, whereas Z Street in this case sought to prevent the IRS from unconstitutionally delaying consideration of its application. Z Street’s suit did not have the obvious purpose of securing assurance that donations will “qualify as charitable deductions” like in “Americans United.”
However, while Bob Jones and “Americans United” did not apply to this particular fact pattern, neither did Cohen. The Court wrote that unlike Cohen, Z Street’s suit could have had implications for assessment and collection, such as obtaining a tax exemption earlier than expected. Instead, the Court resolved that Z Street’s suit fit best with the scenario presented in South Carolina.
The D.C. Circuit held that the Anti-Injunction Act should not bar Z Street’s suit because the plaintiff had no other remedy for its alleged injury. The Court detailed why neither section 7428 (if Z Street had waited 32 additional days to file suit), nor remedies offered by sections 6213 (deficiency petition) or 7422 (refund suit), could provide the relief that Z Street sought. The Court also added that the IRS’s sovereign immunity argument could not bar the suit, because 5 U.S.C. § 702, the Administrative Procedure Act, “waived sovereign immunity with respect to suits for nonmonetary damages that allege wrongful action by an agency or its officers or employees.” The D.C. Circuit affirmed the District Court’s denial of the IRS’s motion to dismiss.
The significance of this D.C. Circuit decision is the interpretation of the Anti-Injunction Act, and subsequently how courts will handle governmental defenses in tax litigation. By rejecting a broad reading of the Anti-Injunction Act, the Court reduced the IRS’s ability to claim that lawsuits are barred on the grounds that they may interfere with IRS’s tax collection efforts.
The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of tax and tax litigation. They will continue to monitor developments in this area of the law. If you have any questions, an attorney can be reached by emailing us at email@example.com or by calling 305.350.5690.