Florida Bankers Assn., et al, v. U.S. Dept. of Treas., (CA Dist Col 11/05/2015) 116 AFTR 2d ¶2015-5404
The Court of Appeals for the District of Columbia Circuit has denied two banking associations’ request for rehearing of their challenge to regs that require U.S. banks to report to IRS the amount of interest paid to certain nonresidents. The Court, in a divided opinion, had previously held that the challenge concerned a penalty that is treated as a tax for Anti-Injunction Act (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. 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 v. Sebelius, (Sup Ct 2012) 109 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 2014-498)
DC Circuit vacates. In a 2-1 decision, the majority opinion for the Court of Appeals for the District of Columbia 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. (A strong dissent, however, found that the AIA was about stopping the “technical processes of assessment or collection” and that it had no applicability in this case.) Accordingly, the district court’s decision was vacated and the case was remanded with directions to dismiss it on AIA-based grounds. (Florida Bankers Assn., et al, v. U.S. Dept. of Treas., (CA Dist Col 08/14/2015) 116 AFTR 2d 2015-5623)
Rehearing denied. The Appellate Court denied the plaintiffs’ petition for rehearing en banc (i.e., by the whole Court as opposed to a 3-judge panel).