It has generally been quite difficult for taxpayers to challenge alleged abuses of the IRS’s regulatory authority. Under section 7421(a) of the tax code, courts lack jurisdiction over suits “for the purpose of restraining the assessment or collection of any tax.” Commentators generally believe that this statute, commonly referred to as the Anti-Injunction Act, prohibits pre-enforcement challenges to the validity of IRS regulations.
So, when the IRS issues an unlawful regulation, affected groups cannot do much about it — their attempts to have the regulations set aside would reflect an attempt to “restrain” the “assessment or collection” of the taxes imposed by the Internal Revenue Code and would be jurisdictionally barred by Section 7421(a). To fight the regulation, the taxpayers would have to put themselves in a tough position — they’d have to violate the regulations and then wait for the IRS to come after them, at which point they can file a lawsuit challenging the regulation in the context of determining their particular tax liabilities.
But the Supreme Court’s recent decision in Direct Marketing Association (DMA) v. Brohl seems to bless pre-enforcement challenges to tax regulations. In that case, the Court interpreted a statute similar to Section 7421 and held that a pre-enforcement challenge could proceed. Although DMA technically did not address Section 7421, the Court relied heavily on federal tax concepts to reach its holding. Thus, it would appear that the Court’s holding in DMA should allow for pre-enforcement challenges to IRS regulations.
In Florida Bankers Association v Commissioner, an industry group attempted to challenge some IRS regulations before their enforcement. However, the D.C. Circuit, over a vehement dissent by Judge Henderson, dismissed DMA and held that Section 7421(a) barred the group’s challenge. Florida Bankers has now filed a petition for certiorari.
If the petition for certiorari is granted, I suspect that the Court will reach a holding consistent with DMA and allow the industry group’s challenge to proceed. However, though the question presented reflects a recurring question of national importance, it might be a little bit early for the Court to take the case. Other courts have yet to opine on how DMA relates to Section 7421, and the Court might wait for further circuits to chime in. Given the force and persuasiveness of Judge Henderson’s dissent, I suspect that other circuits might split from the D.C. Circuit.
In any event, whether or not the Court takes Florida Bankers, the issue presented will be one to watch.