Notice & Comment

Do you C what I C? – CIC Services v. IRS and Remedies Under the APA, by Mila Sohoni

The Supreme Court recently decided CIC Services v. Internal Revenue Service, 593 U.S. __ (2021). Commentators on Notice & Comment and elsewhere have already discussed this decision’s implications for the Anti-Injunction Act and challenges to federal taxes. What has apparently gone unnoticed, however, is what the Court’s decision implies for the Administrative Procedure Act and challenges to federal regulations beyond the tax realm. The scope of available remedies in challenges to federal regulations has been hotly disputed of late, because that issue is part and parcel of the larger debate concerning the propriety of universal injunctions. The Court’s opinion in CIC Services throws some much-needed light on two important points of contention within that debate: what do litigants mean when they ask a court to “enjoin” a rule or “declare” a rule “unlawful” in an APA action, and what does the APA mean when it says that a court may “hold unlawful and set aside” a rule?

In this case, the plaintiff, CIC, filed a suit challenging the reporting requirements imposed on taxpayers and material advisors by Notice 2016-66, an IRS regulatory mandate that CIC contends is both procedurally and substantively unlawful. A failure to comply with the Notice’s reporting requirements exposes the noncompliant party both to criminal sanctions and to steep civil monetary penalties that the Internal Revenue Code designates as “taxes.” Because of the latter, CIC faced a formidable hurdle: the Anti-Injunction Act, which bars any suit “for the purpose of restraining the assessment or collection of any tax.” The district court and the Sixth Circuit reasoned that the relief that CIC requested—the invalidation of the Notice—would have the inevitable consequence of preventing the IRS from assessing or collecting tax penalties for noncompliance with the Notice. The lower courts therefore held that the Anti-Injunction Act required the dismissal of CIC’s suit.

The Supreme Court, however, unanimously reversed, holding that the “purpose” of CIC’s suit was not to restrain the collection or assessment of a tax within the meaning of the Anti-Injunction Act. To decide that point, the Court had to examine CIC’s suit and decide what its purpose was. The parties, naturally, disputed the suit’s purpose. CIC argued that the suit’s “aim” was “invalidating the Notice and thereby eliminating its onerous reporting requirements.” (CIC Servs., slip op. at 8.) The Government, on the other hand, placed emphasis on the fact that CIC sought to “enjoin” the Notice’s enforcement, a result that would “prevent[] the IRS from collecting taxes.” (Id.)

The Court resolved that dispute by looking at “the action’s objective aim—essentially, the relief the suit requests.” (Id. at 7.) The Court held that CIC’s reading was the better:  

To begin with, we agree with CIC’s reading of its complaint. The complaint contests the legality of Notice 2016-66. . . . CIC’s complaint asks for injunctive relief from the Notice’s reporting rules, not from any impending or eventual tax obligation. Contra the Government’s view, a request in an APA action to ‘enjoin the enforcement’ of an IRS reporting rule is most naturally understood as a request to ‘set aside’ that rule (as the complaint elsewhere says), not to block the application of a penalty that might be imposed for some yet-to-happen violation. 5 U.S.C. §706. . . . The complaint, and particularly its request for relief, sets out this suit’s purpose as enjoining the Notice.” (Id. at 9 (emphasis added).)

As this passage reflects, the Court decided that the purpose of CIC’s suit was to “set aside” the Notice, even though the complaint also sought injunctive relief from the Notice’s enforcement. The Court did not slice the salami between these two requests for relief. Instead, the Court treated them as interchangeable ways of expressing CIC’s “objective aim”: to obtain an order invalidating the Notice under the APA.

The quoted passage’s equation of “set aside” with “enjoin the enforcement” was neither casual nor isolated.  In sentences peppered throughout the opinion, the Court conspicuously refused to distinguish between various verbal formulations for the remedy sought by CIC. For example, the Court stated, “the complaint asks the court to ‘set[] aside IRS Notice 2016-66’—more specifically, to ‘enjoin the enforcement of Notice 2016-66 as an unlawful IRS rule’ and to ‘declar[e] that Notice 2016-66 is unlawful.’” (Id. at 4-5 (quoting complaint) (emphasis added).) This sentence treats CIC’s request for an injunction against enforcement and its request for a declaratory judgment as merely “more specific[]” versions of its request that the rule be “set aside.” Elsewhere, after stressing that willful disobedience to the Notice’s reporting obligations would trigger criminal penalties, the Court explained that “those penalties necessitate a suit aimed at eliminating the Notice. . . . Small wonder that CIC’s complaint asks for an injunction against the Notice.” (Id. at 12 (emphasis added).) The Court thereafter added, “[t]he complaint, and particularly the relief sought, targets the Notice’s reporting rule, asking that it be set aside as a violation of the APA.” (Id. at 13.) The Court later repeated: “One last time: CIC’s action challenges, in both its substantive allegations and its request for an injunction, a regulatory mandate—a reporting requirement—separate from any tax.” (Id. at 15 (emphasis added).) The opinion concluded by stating that CIC’s suit “aims to enjoin a standalone reporting requirement.” (Id. at 16.)

Why is all this meaningful for broader debates concerning public law remedies? In 2018, the Department of Justice (DOJ), led by then-Attorney General Jeff Sessions, adopted Litigation Guidelines instructing DOJ civil litigators to argue that in suits brought pursuant to the APA, “[u]niversal [v]acatur [i]s [n]ot [c]ontemplated.” The Guidelines criticized courts that relied on Section 706 to “vacate regulations in their entirety,” contending that the APA “does not permit . . .  such a broad remedy.” (Guidelines at 7.) The Guidelines rested that argument in part on the claim that in an ordinary APA suit “the relevant ‘agency action’” that is “the proper subject of legal challenge” is “the application of a regulation to the plaintiff—not the regulation itself.” (Id.) The Guidelines noted that in some cases a “special statutory review” provision may make the regulation itself (rather than its application) the “‘proper object’” of judicial review. But the Guidelines distinguished such suits from the garden-variety APA case in which no special statutory review provision applies, contending that in such a case “the regulation itself . . . [is] not properly before the court.” (Id.)

As I have elsewhere written, the Guidelines’ characterization of when a regulation—as opposed to its application—can be the object of judicial review is unsound. The Guidelines seemed to deny (or at least to ignore) the fact that when a litigant brings a facial, pre-enforcement challenge to a regulation under the APA, there simply isno “concrete action” applying the rule to the plaintiff that could serve as the object of judicial review: “In such a case, the reviewable ‘final agency action’ must be the rule, not the application of the rule to individuals. It could not be otherwise; the whole point of bringing an Abbott Labs-type facial, pre-enforcement challenge is to seek judicial review before any enforcement action (‘application of the rule’) has been attempted.” (Sohoni at 1167.) CIC’s case is a ready example. The IRS had taken no action whatsoever to apply the rule to CIC. Instead, CIC brought a facial, pre-enforcement challenge to the Notice to ask that the Notice itself be set aside under the APA. The Court evidently saw no difficulty in treating the Notice as the object of judicial review. (See, e.g., CIC Servs., slip op. at 9 (“The complaint contests the legality of Notice 2016-66”); id. at 13 (“[t]he complaint, and particularly the relief sought, targets the Notice’s reporting rule, asking that it be set aside as a violation of the APA”).) Relatedly, the Court’s understanding of CIC’s suit also derails the Guidelines’ contention that a regulation can only be the “proper subject” of judicial review when a “special statutory review” provision applies. CIC’s suit was a filed as an original matter in a federal district court under the ordinary venue rules, not under a special statutory review provision. Yet the Court’s opinion reflected zero discomfiture with the fact that the district court adjudicating the case would ultimately decide upon the Notice’s legality and, if necessary, invalidate it. (See, e.g., id. at 10 (“if the suit succeeds . . . the reporting duty disappears”); id. at 12 (describing the suit as “a pre-enforcement” suit “aimed at eliminating the Notice”).)

CIC Services also casts new light on a recent debate concerning the meaning of the term “set aside” in Section 706 of the APA. Roughly a year ago, Professor John Harrison ventured a novel interpretation of that language in the pages of Notice & Comment. Harrison argued that Section 706’s instruction to courts to “set aside” an unlawful agency action “does not address remedies at all.” On Harrison’s reading, the “set aside” language in Section 706 does not authorize a court to nullify or invalidate the agency action, but instead instructs the court “not to decide in accordance with the agency action.” During the Trump Administration, the Solicitor General cited Harrison’s essay in two Supreme Court briefs, on both occasions relying upon it to argue that Section 706 does not speak to remedies and that it instead simply directs courts to disregard an unlawful rule.

The opinion in CIC Services shows that the Court does not hold this view of the meaning of “set aside.” Throughout its opinion, the Court treats “set aside” as a type of relief. (See, e.g., CIC Servs., slip op. at 4-5 (“So the complaint asks the court to ‘set[] aside IRS Notice 2016-66 …’”); id. at 11 (“the existence of criminal penalties explains why an entity like CIC must bring an action in just this form, framing its requested relief in just this way”). Moreover, the Court not only treats “set aside” as a kind of relief, but the Court also necessarily is using the term “set aside” in its conventional sense: to mean “invalidate,” not merely to “ignore.” A suit like CIC’s perfectly illustrates why “set aside” cannot sensibly be understood to mean merely ‘hold the rule off to one side and decide the case as if the rule did not exist.’ CIC’s complaint did not ask the district court to disregard the Notice or ‘hold the Notice off to one side’—it asked the court to invalidate the Notice. (Id. at 4 (“This suit challenges the lawfulness of Notice 2016-66.”); id. at 13 (“[t]he complaint, and particularly the relief sought, targets the Notice’s reporting rule, asking that it be set aside as a violation of the APA. . . . CIC’s suit targets the upstream reporting requirement. . . . [T]hat is the suit’s aim.”).) The Court correctly understood CIC’s complaint to seek relief that would “run against” the IRS rule. (See, e.g., id. at 13 (“the injunction [CIC] requests does not run against a tax at all. . . . The suit contests, and seeks relief from, a separate legal mandate.”).) So did Justice Kavanaugh in his concurrence. (CIC Servs. (Kavanaugh, J., concurring), slip op. at 3 (“pre-enforcement suits challenging a regulation backed by a tax penalty[] . . . may proceed because the requested relief runs against an independent legal obligation.”) (emphasis added).)

Last if not least, CIC Services also matters for what it reveals about the Court’s understanding of the “form of proceeding” through which a litigant may seek to have a rule invalidated (or “set aside”). As the flip side of his argument that Section 706 does not address remedies, Professor Harrison argued that “the APA addresses remedies . . . in Section 703,” the section that specifies the “form of proceeding” for suits challenging agency action. In Harrison’s view, the appropriate remedy in an APA suit depends on the form of proceeding. If the form of proceeding is a suit for injunctive relief—an “injunctive proceeding,” in his terms (Harrison at 45)—then the suit is not one that can result in the rule’s invalidation, because a suit seeking an injunction produces an order “directed to the enforcement official” (id. at 46), rather than an order that can determine the validity or the invalidity of a rule. For similar reasons, he contended, a suit seeking declaratory relief cannot result in the invalidation of a rule, for (Harrison argued) a “declaratory proceeding” can declare legal relations but not change them: “[a] declaratory judgment . . . cannot bring that invalidity about, because it declares and does not alter legal relations.” (Id. at 45-46.)

In CIC Services, however, the Court eschewed this kind of line-drawing. Litigants bringing pre-enforcement APA facial challenges to rules may frame their requested relief in a variety of ways—as a request to enjoin the rule, or to enjoin the rule’s enforcement, or to set aside the rule, or to strike down the rule, or to declare the rule invalid, or to invalidate the rule. Should anything of substance turn on that sort of framing choice? I do not think so; as Ronald Levin and I have elsewhere written, the “choice of one verbal formula rather than the other should not change the situation.” CIC Services shows that the justices—all nine of them—apparently also regard such variations in phrasing as irrelevant. Again and again, the Court simply treats it as immaterial whether the relief that CIC seeks is described as injunctive, as declaratory, as “set aside” relief, or as something else entirely (“eliminating the Notice,” CIC Servs., slip op. at 8 & 12, or causing a duty to “disappear[],” id. at 10). Indeed, far from distinguishing between CIC’s various prayers for relief, the Court goes out of its way to state that CIC’s request that the IRS rule be “set aside” subsumes its request for a declaration of invalidity and its request for an injunction against enforcement. (Id. at 4-5 (calling the latter two “more specific[]” aspects of the first).) All these mix-and-match phrases are simply different handles for getting at the same underlying thing—that the relief in an APA facial challenge to a rule runs against the rule. The “applicable form of legal action” in a facial, pre-enforcement challenge to a rule under the APA is that familiar “one form of action—the civil action.” The interim and final remedies available in a civil action are determined not by its form, but by other provisions of law, including (in a facial, pre-enforcement challenge to a rule under the APA) by Sections 705 and 706.

The Supreme Court’s decision in CIC Services is just the end of the beginning of this litigation; all CIC has won so far is the reversal of the dismissal of its complaint. Likewise, the decision is not the end of the debate over universal vacatur. While the opinion does treat set aside relief as running against the rule in a facial APA challenge, the Court does not squarely say ‘to be clear, if CIC prevails and the Notice is set aside, then the Notice is set aside ‘as to everyone,’ not merely set aside ‘as to CIC.’’ Yet even though it stops shy of spelling out that point expressly, the Court’s opinion nonetheless reveals some serious weaknesses in the key building blocks of the arguments made against universal vacatur. Those who are interested in the meaning of Section 706 and in suits involving facial, pre-enforcement APA challenges to federal regulations should therefore take a serious look at how the (unanimous) Court conceived of CIC’s suit and the relief it sought.

Mila Sohoni is the Associate Dean of Faculty and Professor of Law at the University of San Diego School of Law.

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