Should a Business Have to Violate the Law in Order to Challenge a Regulation in Court?

Date: March 02, 2016

The Anti-Injunction Act (AIA) bars suits restraining the assessment and collection of federal taxes. The purpose is to ensure that federal revenues are not affected by litigation. Thus, taxpayers must first pay a tax in order to contest the validity of a tax or the amount of an IRS assessment. But in Florida Bankers Association v. Department of Treasury, the D.C. Circuit interpreted the AIA broadly, so as to prohibit businesses from contesting the validity of Department of Treasury regulations, as opposed to contesting the assessment or collection of a tax.

In this case, two state banking associations, representing small regional banks, seek to challenge Department of Treasury regulations requiring the reporting of information about foreign investments in American banks—information that the United States passes along to foreign nations in exchange for information on how Americans citizens are investing their assets abroad. In theory, the mutual sharing of such information would enable the IRS to identify cases in which an individual or business has underreported income. Accordingly, the regulations are intended to help facilitate the collection of taxes, but do not themselves impose a tax. The regulations merely impose a reporting requirement, which would trigger penalties only if there is a violation.

But because the D.C. Circuit held that those penalties constituted a tax for the purposes of the AIA, it held that the suit was barred by the AIA statute. Writing for the majority, Judge Kavanaugh reasoned that the AIA must bar the suit because invalidation of the reporting requirement would necessarily prevent the federal government from imposing tax-penalties. Thus, the D.C. Circuit held that the only way that one could challenge the regulation would be to commit a misdemeanor by violating the regulation, pay the penalty ($25,000 for an individual, and $100,000 for a corporation) and then sue for reimbursement.

But, as Judge Henderson argued, in dissent, an interpretation requiring an individual or business to violate the law, and risk financial or criminal sanctions in order to advance a legal challenge, raises grave due process concerns. Moreover, her dissent emphasized that the majority’s opinion was in conflict—or at least tension—with the Supreme Court’s recent decision in Direct Marketing v. Brohl (2015).

In Direct Marketing, the Supreme Court addressed a similar question under the federal Tax Injunction Act (TIA), which prohibits suits restraining the assessment and collection of state taxes. The case concerned the validity of regulations requiring the reporting of information on consumers—in that case, information about online purchases. The Supreme Court ultimately accepted NFIB’s position, unanimously rejecting the government’s argument that the TIA should be interpreted as barring all pre-enforcement challenges to tax-related regulations. Yet notwithstanding the Supreme Court’s narrow interpretation of the TIA, the D.C. Circuit interpreted nearly identical language in the AIA expansively in the present case, so as to prohibit challenges to similar reporting requirements.

Accordingly, the NFIB Small Business Legal Center is asking the Supreme Court to hear arguments in Florida Bankers Association. The case raises two important questions: (1) Whether the AIA should be interpreted to allow pre-enforcement suits challenging Department of Treasury regulations, and (2) whether an interpretation foreclosing pre-enforcement challenges violates due process in requiring individuals to violate the law in order to raise their legal concerns. And although the larger small business community is not necessarily concerned with the substance of the Department of Treasury regulation at issue here, we are concerned that this D.C. Circuit decision sets a dangerous precedent in so far is forecloses pre-enforcement challenges to regulations that small business might seek to challenge on statutory or constitutional grounds in the future.

For example, the IRS has controversially taken the position that small businesses are prohibited from offering their employees a set amount of money to help with their health care costs, unless the company provides health insurance to its employees—notwithstanding the fact that the ACA imposes absolutely no obligation on small businesses to provide health insurance. IRS maintains that such practices violate the Affordable Care Act’s prohibition on annual or lifetime limits on health care coverage—even though one would have thought those prohibitions were directed at insurance companies, not mom-and-pop businesses. In any event, if a small business owner wants to challenge IRS’ interpretation of the ACA, the D.C. Circuit’s decision in Florida Bankers Association will likely prove problematic. Under Florida Bankers Association, the government would likely argue that the AIA bars the suit until the business has violated the ACA and paid the penalties. But of course the penalties for a violation can be ruinous, and so we maintain that it would be unconstitutional to require a business to incur those penalties before being allowed to bring a lawsuit.

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