Challenge to Listed Transaction Notice Held Barred by Anti‐Injunction Act

• DOI: http://doi.org/10.1002/npc.30627
• Published date: 01 August 2019
• Date: 01 August 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

August 2019 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

any formal relationship between the entities. He did not

seek or obtain approval in advance from the Catholic

Church regarding any aspect of his evangelism activities;

he was not required to report to the Church about these

activities.

The Tax Court painstakingly reviewed each of the

expenses at issue (about $40,000) and concluded

that most of them were incurred, in whole or in part,

for personal purposes and thus are not deductible as

charitable gifts (Oliveri v. Commissioner, decision dated

May 28). For example, the “cost of eating in a restau-

rant is a personal expense and is not made deductible

by evangelizing persons randomly encountered while

eating.” Because this individual’s evangelism activities

were “mostly random and uncoordinated by either the

Catholic Church or BSDM,” the expenses associated

with those activities were likewise ruled nondeductible.

The evangelist did not obtain any gift substantiation

documentation. The court held that the basic require-

ment of a contemporary written acknowledgment (IRC §

170(f)(8)) applies with respect to unreimbursed expenses,

so some of his expenditures were rendered nondeduct-

ible on that basis.

This individual contended that the IRS characterized

his evangelism “as if it were not a religious activity” to

the extent that the IRS unconstitutionally discriminated

against him because of his religious beliefs. The court

rejected that argument, stating that the IRS’s position is

that the expenses involved are not deductible, not that

the individual’s activities are not religious. A correspond-

ing argument was that the government’s three audits

of him over the span of 10 years constitute “excessive

Government entanglement with his exercise of religion.”

This argument was unsuccessful because the court reit-

erated its general policy of not looking behind notices of

deficiency to examine IRS motives or the administrative

policy or procedures involved in making the determina-

tion. [9.15, 9.16., 21.3(a)] ◆

CHALLENGE TO LISTED

TRANSACTION NOTICE HELD

BARRED BY ANTI-INJUNCTION

ACT

A lawsuit was filed seeking to enjoin enforcement of

an IRS notice that identified a transaction as a transac-

tion of interest, on the grounds that the notice was

promulgated in violation of the Administrative Procedure

Act (because the notice-and-comment rule was not

followed and the notice is allegedly arbitrary and capri-

cious) and the Congressional Review Act. The plaintiff

is a material advisor to taxpayers engaging in the trans-

action involved. The district court dismissed the case

for lack of subject-matter jurisdiction, holding that the

complaint is barred by the Anti-Injunction Act. The US

Court of Appeals for the Sixth Circuit, by decision dated

May 22, affirmed (2-1) the dismissal (CIC Services, LLC v.

United States).

Law

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” (IRC

§ 7421(a)). (There are a few inapplicable exceptions to

this law.) Thus, a court presented with a complaint must

determine whether it is properly characterized as one

involving this type of lawsuit.

Congress delegated authority to the IRS to identify

and gather information about potential tax shelters

(IRC § 6707A). The IRS requires taxpayers and certain

third parties to maintain and submit records pertaining

to reportable transactions (IRC § 6707A(c)). Reportable

transactions are those transactions deemed as such by

IRS regulation (Id.; Reg. § 1.6011-4(b)).

Failure to adhere to these IRS requirements can result

in significant penalties. For example, an individual who

fails to submit to the IRS a return listing his or her report-

able transactions faces a penalty of 75 percent of his or

her tax savings resulting from these transactions, from a

minimum of $5,000 to a maximum of $200,000 (IRC §§

6011, 6707A(b)). A material advisor — one who provides

material aid to one or more individuals in his, her, or their

carrying out reportable transactions and who derives

a threshold amount of gross income from provision of

that aid (IRC § 6111(b)) — faces similar penalties. For

example, a material advisor who fails to submit to the

IRS a return listing the reportable transactions in which

he or she aided faces a penalty of between $50,000 and

$200,000 (IRC § 6111(a), 6707(b)). Likewise, a material

advisor who fails to maintain a list of the taxpayers he

or she aided in carrying out reportable transactions faces

a penalty of $10,000 per day if the list is not produced

to the IRS within 20 business days of a request from the

agency (IRC §§ 6112(a), 6708(a)).

Transactions of interest are one of five categories of

reportable transactions (Reg. § 1.6011-4(b)(6)).

Analysis

The plaintiff in this case asserted that the AIA is not

implicated in its lawsuit, in that it is a suit to enjoin the

enforcement of a reporting requirement, not enjoin tax

assessment or collection. The US Supreme Court has

recognized that information gathering, in accordance

with a reporting rule, is a phase of tax administration

procedure occurring before assessment or collection, just

as assessment must precede collection.

But the appellate court made much of the fact that

this reporting requirement is enforced by penalties (IRC

§§ 6707, 6707A, 6708) that constitute taxes (IRC §