Earlier this month, the United States Court of Appeals for the D.C. Circuit held in Florida Bankers Ass’n v. U.S. Dep’t of the Treasury, No. 14-5036 (D.C. Cir. Aug. 14, 2015) that the Anti-Injunction Act (AIA, codified at 26 U.S.C. § 7421(a)) barred two state banking associations from challenging Treasury regulations that: (1) required banks to annually report interest paid to certain foreign account-holders, and (2) imposed a penalty on banks that fail to do so.  Notwithstanding attempts to reconcile the holding with recent precedent, the majority’s decision directly conflicts with the recent unanimous Supreme Court decision in Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (March 3, 2015) (DMA), which found that the Tax Injunction Act (TIA, codified at 28 U.S.C. § 1341) did not bar a retail association’s challenge to comparable Colorado notice and reporting requirements (and accompanying penalty) imposed on out-of-state retailers.  The TIA is modeled off of, and has consistently been interpreted to apply in the same fashion as its federal companion, the AIA. Given the striking similarities between the two cases, it is hard to reconcile the expansive application of the AIA in Florida Bankers with the narrow analysis of the TIA in DMA.

Majority Opinion

The majority opinion begins by highlighting the fact that the penalty imposed on the banks is technically a “tax” for purposes of the AIA because it is found in a specific section of the Internal Revenue Code (IRC, Ch. 68, Subchapter B) that states as much. See 26 U.S.C. § 6671(a). The majority emphasized that the Supreme Court recently confirmed that these types of penalties are treated as taxes when analyzing the application of the AIA, citing to the Nat’l Fed. of Indep. Bus. v. Sebelius decision. The majority distinguishes DMA on the basis that, unlike the tax-penalty in Chapter 68B of the IRC, the Colorado penalty imposed on out of state retailers that failed to report was not—or at least the parties never argued or suggested that it was—itself a tax. The majority was clear that “[i]f the penalty here were not itself a tax, the Anti-Injunction Act would not bar this suit.” Because the penalty was a “tax”, a favorable ruling for the plaintiffs “would invalidate the reporting requirement and restrain (indeed eliminate) the assessment and collection of the tax paid for not complying with the reporting requirement.”  Because of this, the majority held that the banking associations’ challenge to the reporting requirements was barred by the AIA.

Practice Note: The majority relies heavily on the technical tax-penalty distinction in reaching their holding that the AIA applied. In making this distinction, the majority suggests that the label given to a penalty is controlling in determining whether the AIA and TIA apply to shut the door to federal district court. While at first glance it would appear that the holding is limited in scope to federal tax issues, it has the potential to spill over into the state tax world since many states have specifically conformed to [...]

Continue Reading