United States District Court, E.D. Tennessee
BRUCE GUYTON MAGISTRATE JUDGE
R. McDONOUGH UNITED STATES DISTRICT JUDGE
the Court is a motion to dismiss filed by Defendants, the
Internal Revenue Service, the Department of Treasury, and the
United States of America. (Doc. 25.) Also before the Court is
Plaintiffs CIC Services, LLC ("CIC"), and Ryan,
LLC's ("Ryan") conditional motion for leave to
amend. (Doc. 26.) For the reasons stated hereafter,
Defendants' motion to dismiss (Doc. 25) will be
GRANTED, and Plaintiffs' conditional
motion for leave to amend (Doc. 26) will be
November 1, 2016, the Internal Revenue Service
("IRS") issued IRS Notice 2016-66 (the
"Notice"). In the Notice, the IRS expressed concern
that "micro-captive transactions" had the potential
for tax avoidance or evasion and classified these
transactions as "transactions of interest" for the
purposes of 26 C.F.R. § 1.6011-4 and 26 U.S.C.
§§6011 and 6012. (Doc. 1-1, at 2-3.) Based on this
classification, the Notice directs that: (1) "[p]ersons
entering into these transactions on or after November 2,
2006, must disclose the transaction" to the IRS; and (2)
"[m]aterial advisors who make a tax statement on or
after November 2, 2006, with respect to transactions entered
into on or after November 2, 2006, have disclosure and
maintenance obligations under §§6111 and 6112"
of the Internal Revenue Code. (Id. at 12.) The Notice
further provides that taxpayers and material advisors are
required to file a disclosure statement regarding these
transactions prior to January 30, 2017, and that persons who
fail to make required disclosures "may be subject to . .
. penalty" under 26 U.S.C. §§ 6707(a), 6707A,
and 6708(a). (Id. at 13, 15.) Finally, the Notice
requests comment "on how the transaction might be
addressed in published guidance." (Id. at 16.)
On December 30, 2016, the IRS issued Notice 2017-08, which
extended the deadline for required disclosure of the
transactions at issue to May 1, 2017. (Doc. 1-2.)
March 27, 2017, Plaintiffs initiated the present
action. (Doc. 1.) According to the allegations in
their verified complaint, CIC is "a manager of captive
insurance companies, " and Ryan is a "broad-based
accounting, consulting, and tax services corporation, which
also manages captive insurance companies." (Id.
at 3.) In these capacities, Plaintiffs assert that they are
subject to the Notice's disclosure requirements for
material advisors and that complying with the Notice's
disclosure requirements will force them to incur significant
costs. (Id. at 10.) Plaintiffs assert, however, that
the Notice: (1) constitutes a "legislative-type
rule" that fails to comply with mandatory
notice-and-comment requirements under the Administrative
Procedures Act (" APA"), 5 U.S.C. § 533,
et seq.; (2) is "arbitrary and capricious and
ultra vires in nature"; and (3) fails to comply
with the requirements of the Congressional Review of Agency
Rule-Making Act, 5 U.S.C. § 801, because the IRS failed
to submit it to Congress and the Comptroller General.
(Id. at 2.) Based on these allegations, Plaintiffs
seek, among other things, a declaration under the Declaratory
Judgment Act ("DJA"), 28 U.S.C. § 2201, that
the Notice is invalid and an injunction prohibiting the IRS
from enforcing the disclosure requirements set forth in the
Notice based on the IRS's failure to comply with the
APA's notice-and-comment requirements.
after filing their complaint, Plaintiffs moved the Court for
a preliminary injunction prohibiting the IRS from enforcing
the disclosure requirements set forth in the Notice.
(See Doc. 8.) On April 21, 2017, the Court denied
Plaintiffs' motion for preliminary injunction, reasoning,
in part, that Plaintiffs were unlikely to succeed on the
merits of their claims because such claims are likely barred
by the Anti-Injunction Act ("AIA"), 26 U.S.C.
§ 7421. On May 30, 2017, Defendants moved to dismiss
Plaintiffs' claims, arguing, among other things, that the
Court lacks subject-matter jurisdiction. (Doc. 25.)
Defendants' motion is now ripe for the Court's
STANDARD OF LAW
motion to dismiss for lack of subject matter jurisdiction
under Federal Rule of Civil Procedure 12(b)(1) involves
either a facial attack or a factual attack." Glob.
Tech., Inc. v. Yubei (XinXiang) Power Steering Sys. Co.,
807 F.3d 806, 810 (6th Cir. 2015). A facial attack "is a
challenge to the sufficiency of the pleading, " and, on
such a motion, "the court must take the material
allegations of the petition as true and construed in the
light most favorable to the nonmoving party." United
States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994).
"A factual attack, on the other hand, is not a challenge
to the sufficiency of the pleading's allegations, but a
challenge to the factual existence of subject matter
jurisdiction." Id. "On such a motion, no
presumptive truthfulness applies to the factual allegations,
. . . and the court is free to weigh evidence and satisfy
itself as to the existence of its power to hear the
case." Id. (internal citations omitted).
case, because Defendants challenge the sufficiency of
Plaintiffs' complaint, and because the Court will not be
required to make any factual findings in deciding whether it
has jurisdiction, the Court will consider Defendants'
motion as a facial attack and take Plaintiffs'
allegations as true for the purposes of ruling on the Rule
primarily argue that the Court should dismiss Plaintiffs'
claims because it lacks subject-matter jurisdiction due to
the AIA and the tax exemption to the DJA. (Doc. 25-1, at 7.)
In relevant part, the AIA provides that "no suit for the
purpose of restraining the assessment or collection of any
tax shall be maintained in any court by any person, whether
or not such person is the person against whom such
tax was assessed." 26 U.S.C. § 7421
(emphasis added). Similarly, the DJA provides that a Court
may "declare the rights and legal relations of any
interested party seeking such declaration, " except
"with respect to Federal taxes . . . ." 28 U.S.C.
§ 2201(a). "The federal tax exemption to the
Declaratory Judgment Act is at least as broad as the
Anti-Injunction Act." Ecclesiastical Order of the
ISM of AM, Inc. v. IRS, 725 F.2d 398, 402 (6th Cir.
1984) (quoting Bob Jones Univ. v. Simon, 416 U.S.
725, 733, n.7 (1974)). Defendants contend that
Plaintiffs' claims and their requested injunction violate
the AIA and the tax exemption to the DJA, because any ruling
in Plaintiffs' favor will necessarily operate to restrain
tax assessment and collection. (Doc. 25-1, at 13.)
the Notice provides that persons who fail to comply with it
will be subject to "penalty" under 26 U.S.C.
§§ 6707(a), 6707A, and 6708(a), the plain language
of governing statutes establishes that such a
"penalty" is a "tax" within the AIA's
prohibition against injunctive relief. Specifically, 26
U.S.C. § 6671(a) provides:
The penalties and liabilities provided by [Subchapter 68B]
shall be paid upon notice and demand by the Secretary, and
shall be assessed and collected in the same manner as
taxes. Except as otherwise provided, any
reference in this title to "tax" imposed by this
title shall be deemed also to refer ...