Internal Revenue Service

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This case asks the Supreme Court to interpret the Anti-Injunction Act and to determine whether it bars pre-enforcement legal challenges to agency guidelines and regulations that incorporate a tax-penalty enforcement mechanism into the framework. CIC Services argues that the Supreme Court should construe the Administrative Procedure Act’s review provisions broadly enough and the Anti-Injunction Act’s prohibitory provisions narrowly enough to provide material tax advisors relief from the Internal Revenue Service’s new interpretative guidelines concerning reportable transactions. The Internal Revenue Service counters that the Anti-Injunction Act applies to CIC’s challenge so the lawsuit is barred and that none of the available exceptions to the Anti-Injunction Act’s provisions apply to CIC’s sought injunction. This case has important implications for corporations whose business involves reporting earnings to the Internal Revenue Service, as well as for federal agencies’ abilities to avoid lawsuits by tying in certain tax-penalty provisions.

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This case asks the Supreme Court to determine whether a proceeding about an IRS proposed levy to collect unpaid taxes becomes moot when there is no longer a dispute regarding the proposed levy. Commissioner of Internal Revenue contends that the Tax Court lacked jurisdiction because there was no longer a live dispute and the petitioner lacked any cognizable interest in the case. Zuch argues that the Tax Court retained jurisdiction because the parties continued to have an interest in the case since the Tax Court could determine petitioner’s right to a refund. The outcome of this case affects the scope of Tax Court proceedings under 26 U.S.C. § 6330 and impacts taxpayers. 

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Elmer and Dorothy Cullers created the EC Term of Years Trust (“the Trust”) to reduce the impact of federal taxes on their estate. When the IRS claimed the Cullers had transferred property to the Trust to avoid paying taxes, the Trust opened a bank account to pay the back-taxes. The IRS levied on the account.  Afterwards , the Trust sought to recover the funds under 26 U.S.C. § 7426 (wrongful levy statute) and 28 U.S.C. § 1346 (tax refund statute). At  issue in this case  is whether 26 U.S.C. § 7426, with its shorter statute of limitations, is the exclusive remedy for wrongful levy actions by third parties, or whether third parties may alternatively seek relief under the more general tax refund provisions of 28 U.S.C. § 1346, which has a longer statute of limitations. The Court’s  decision in this case  will determine whether wrongful levy claimants will have this longer statutory period during which to bring suit against the U.S. The Court’s decision will also implicitly give weight to particular methods of statutory interpretation and ways of determining congressional intent.

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Michael Knight, trustee of the Rudkin Testamentary Trust, petitioned the United States Tax Court to dispute the Internal Revenue Service ("IRS") assessment that the Trust owed taxes for investment-advisory expenses Knight had deducted in full. The Internal Revenue Code contains a 2% floor on all itemized deductions. The IRS assessed that Knight failed to recognize this floor, significantly lowering the deduction amount. Knight argued these expenses should be exempt because they were necessary for Knight to fulfill his fiduciary duties as a trustee. The Tax Court stated that, to be exempt, Knight needed to show these expenses would not have been incurred if the assets were not held in trust. The Tax Court found Knight failed to satisfy his burden of showing that the expenses were unique to trusts and decided in favor of the IRS. The United States Court of Appeals for the Second Circuit affirmed the Tax Court's holding. The Supreme Court of the United States granted certiorari to resolve a conflict between a holding by the Sixth Circuit and those of the Second, Fourth, and Federal Circuits. As trustees spend billions of dollars yearly on management advice, this case will have wide-reaching consequences. A decision for the IRS will result in the same level of taxation on investment-management expenses for individuals and trusts and more taxes to the IRS tempered by decreased use of management services by trustees. A decision for Knight would lower the taxes of trustees and encourage trustees to use investment-management services.

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In this case, the Supreme Court will determine what mental state an individual must possess to be guilty of obstructing an IRS investigation. The case arises out of business owner Carlo J. Marinello’s decisions to avoid paying taxes, destroy business records, and pay his employees under the table. The IRS charged Marinello for these business practices, claiming they obstructed the due administration of the Tax Code. Marinello argues, however, that an individual is guilty of obstructing the IRS only if the IRS can show that the individual knew of an ongoing IRS investigation; Marinello analogizes to other criminal statutes and cites court precedent and later statutory amendments to argue that the government’s contrary conclusion is unconstitutional. The government counters that the ordinary meaning of the relevant statutory clause is unambiguous––due administration of the Tax Code includes all IRS duties––and it is therefore unnecessary to draw analogies or look to legislative history to interpret the clause. Marinello claims that if the government prevails, then the IRS could recast innocent tax planning as a felony and give prosecutors impermissibly broad discretion in charging taxpayers with crimes—a claim the government vehemently denies. Thus, the scope of liability for tax crimes is at stake.

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The IRS investigated the tax returns of Dynamo Holdings Limited Partnership, and in 2010, notified the partnership of deficiencies in its tax returns. The IRS issued summonses to third parties associated with DHLP, including the chief financial officer of the partnership, Respondent Michael Clarke. None of the parties responded to the summonses. DHLP challenged the IRS’s determination in tax court, and in April 2011, the IRS sought enforcement of the unanswered summonses in federal district court. DHLP and Clarke argued that the summonses failed to properly serve an investigative purpose and that the IRS issued them with retaliatory motives. The United States argues that the summonses should be enforced without an evidentiary hearing because the IRS has broad authority to issue summonses, and the evidence fails to show that the IRS had issued the summonses for an improper purpose. Clarke argues that he is entitled to an evidentiary hearing because he sufficiently alleged and demonstrated evidence to show that the IRS issued the summonses to gain an unfair litigation advantage, which is an abuse of the IRS’s power to issue summonses. 

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In 2006, the IRS adjusted Respondent Home Concrete’s 1999 tax return, claiming that Home Concrete overstated its basis in sold assets. The Fourth Circuit found that this adjustment was untimely under the general three year statute of limitations for IRS actions, concluding that overstatements of basis are not omissions that would trigger an extended six year statute of limitations. Petitioner, the United States, argues that the language and purpose behind the statute clarify that overstating a sold asset’s basis triggers the extended period, and that the Fourth Circuit should have deferred to the IRS's statutory interpretation contained within a Treasury Department regulation finalized during the appeal. Home Concrete argues that Supreme Court precedent applies here, eliminating ambiguity in the statutory interpretation. The Supreme Court’s decision will resolve a circuit split over the proper limitations period; the decision will also address the degree of deference due to a Treasury regulation that may be interpreted as conflicting with Supreme Court precedent, and that may be viewed as applying retroactively. The Court’s decision may affect the IRS’s timeframe to detect certain complex tax schemes, and the time period within which taxpayers are subject to audits.

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