Govig & Associates Incorporated v. United States of America ( 2023 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Govig & Associates, Inc., an Arizona No. CV-22-00579-PHX-DGC corporation; Todd A. Govig; and Richard A. 10 ORDER Govig and Jeanette H. Govig, spouses, 11 Plaintiffs, 12 v. 13 United States of America; Internal Revenue Service; and Department of the Treasury, 14 Defendants. 15 16 17 The Internal Revenue Service (“IRS”) has determined that Plaintiff Govig & 18 Associates and its owners failed to disclose their participation in a “listed transaction” 19 described in IRS Notice 2007-83. The IRS assessed tax penalties against Plaintiffs for 20 2015 and proposed additional penalties for 2015-2017. Plaintiffs argue that Notice 21 2007-83 was issued in violation of the Administrative Procedure Act (“APA”) and seek 22 an order setting it aside, requiring the refund of a penalty paid for 2015, and declaring 23 that the penalties proposed for 2015-2017 must be rescinded. Doc. 1. 24 The United States moves to dismiss for lack of subject matter jurisdiction and 25 failure to state a claim. Doc. 23; see Fed. Rs. Civ. P. 12(b)(1), (6). It argues that the 26 Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421(a), and the “tax exception” to the 27 Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201(a), deprive the Court of 28 jurisdiction because this suit seeks to restrain the assessment of a tax. Doc. 23 at 6-8, 1 15-24.1 The United States further argues that Plaintiffs cannot rely on the APA’s waiver 2 of sovereign immunity and that the APA claims are barred by issue preclusion and the 3 statute of limitations. Id. at 8, 24-30. The Court held oral argument on March 2, 2023. 4 See Doc. 43. The Court will grant the motion in part and deny it in part. 5 I. Background. 6 A. Regulatory Landscape. 7 Federal tax collection is based on a “system of self-reporting.” United States v. 8 Bisceglia, 420 U.S. 141, 145 (1975). There is legal compulsion to be sure, but the 9 government largely “depends upon the good faith and integrity of each potential taxpayer 10 to disclose honestly all information relevant to tax liability.” Id. It would be naive, 11 however, “to ignore the reality that some persons attempt to outwit the system, and tax 12 evaders are not readily identifiable.” Id. 13 Congress has authorized the IRS to establish procedures for collecting information 14 from taxpayers. A federal statute requires taxpayers to provide information in a return or 15 statement when IRS regulations require it. 26 U.S.C. § 6011(a). 16 IRS regulations say taxpayers must disclose their participation in certain “listed 17 transactions” the agency has selected for scrutiny. 26 C.F.R. § 1.6011-4; see Interior 18 Glass Sys., Inc. v. United States, 927 F.3d 1081, 1082 (9th Cir. 2019). “Listed 19 transaction” is defined as “a transaction that is the same as or substantially similar to one 20 of the types of transactions that the [IRS] has determined to be a tax avoidance 21 transaction and identified by notice, regulation, or other form of published guidance as a 22 listed transaction.” 26 C.F.R. § 1.6011-4(b)(2); see also 26 U.S.C. § 6707A(c)(2). 23 To incentivize disclosure, Congress has authorized the IRS to impose monetary 24 penalties on those who fail to file a required statement. 26 U.S.C. § 6707A(a); see 25 Interior Glass, 927 F.3d at 1082-83. The penalty for failing to disclose a listed 26 transaction generally is 75 percent of the decrease in tax shown on the return as a result 27 1 Citations are to page numbers attached to the top of pages by the Court’s 28 electronic filing system. 1 of such transaction. 26 U.S.C. § 6707A(a)-(b); see Laidlaw’s Harley Davidson Sales, 2 Inc. v. Comm’r of Internal Revenue, 29 F.4th 1066, 1068 (9th Cir. 2022). A penalty 3 assessed under § 6707A is deemed a “tax” for purposes of the Internal Revenue Code, 4 including the AIA. 26 U.S.C. § 6671(a); see Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 5 U.S. 519, 544 (2012). 6 Taxpayers who believe penalties have been assessed in error are often barred from 7 challenging the assessments in federal court because the AIA prohibits most suits to 8 restrain the assessment of taxes. 26 U.S.C. § 7421(a). Such taxpayers are not without a 9 legal remedy, however, because Congress has authorized refund suits. See 26 U.S.C. 10 § 7422(a); 28 U.S.C. § 1346(a)(1). The taxpayer must first pay the penalty and exhaust 11 administrative remedies by filing a refund claim with the IRS. See § 7422(a); Dunn & 12 Black, P.S. v. United States, 492 F.3d 1084, 1091 (9th Cir. 2007). Then, if the claim is 13 denied or not approved within six months, the taxpayer may bring a refund suit under 14 § 1346(a)(1). That section confers subject matter jurisdiction and “waives the 15 government’s sovereign immunity by authorizing federal district courts to hear ‘any civil 16 action against the United States for the recovery of any internal-revenue tax alleged to 17 have been erroneously or illegally assessed or collected, or any penalty claimed to have 18 been collected without authority[.]’” Dunn & Black, 492 F.3d at 1088 (cleaned up). 19 B. IRS Notice 2007-83. 20 One of the ways the IRS identifies listed transactions is by issuing published 21 notices. See 26 C.F.R. § 1.6011-4(b)(2). In November 2007, the IRS issued Notice 22 2007-83, titled “Abusive Trust Arrangements Utilizing Cash Value Life Insurance 23 Policies Purportedly to Provide Welfare Benefits.” 2007-45 I.R.B. 960, 2007-2 C.B. 960, 24 2007 WL 3015114 (Nov. 5, 2007). Certain trust arrangements using cash value life 25 insurance policies – which combine life insurance coverage with an investment account – 26 were being promoted to small businesses “as a way to provide cash and other property to 27 the owners of the business on a tax-favored basis.” 2007 WL 3015114, at *1. The 28 trustees in such arrangements used the employer’s contributions to purchase cash value 1 life insurance policies on the lives of the business owners or other key employees. When 2 the trust was terminated after several years, the cash value life insurance policies, cash, or 3 other property held by the trust would be distributed to these individuals. Id.; see Interior 4 Glass, 927 F.3d at 1083-84. Notice 2007-83 informs taxpayers and their advisors that the 5 tax benefits generated by such trust arrangements are not allowed under federal tax laws 6 and the arrangements are “listed transactions” for purposes of 26 C.F.R. § 1.6011-4(b)(2). 7 2007 WL 3015114, at *1. As a result, participants must disclose the transactions to the 8 IRS by filing a Form 8886 disclosure statement. 26 C.F.R. § 1.6011-4(d). Failure to file 9 the form can result in civil tax penalties under 26 U.S.C. § 6707A and criminal penalties 10 under 26 U.S.C. § 7203 of a misdemeanor, with up to a year in prison and fines. 11 C. Facts and Procedural History. 12 Govig & Associates (the “company”) is an executive recruiting agency owned by 13 Plaintiffs Todd Govig and Richard and Jeanette Govig. The Govigs are participants in a 14 Death Benefit and Restricted Property Trust implemented by the company in 2015 (the 15 “Govig trust”). The IRS determined that the Govig trust was a listed transaction under 16 Notice 2007-83 and that Plaintiffs failed to disclose their participation. In August 2019, 17 the IRS assessed § 6707A penalties against Plaintiffs for 2015. 18 Plaintiffs paid the 2015 penalties and filed suit to have Notice 2007-83 set aside 19 under the APA. See Doc. 1, Govig & Assocs., Inc. v. United States, No. CV-19-05185- 20 PHX-SMB (“Govig I”). The district judge dismissed the suit for lack of subject matter 21 jurisdiction, finding that the AIA barred it from “hearing the case as doing so would 22 inhibit the assessment or collection of a tax assessed under 26 U.S.C. § 6707A.” Doc. 32 23 at 1-2; see also Govig I, 2020 WL 6048301 (D. Ariz. Oct. 13, 2020). 24 On October 15, 2020, the IRS proposed the assessment of § 6707A penalties 25 against Plaintiffs for the years 2015-2017. Plaintiffs filed suit again in November 2020, 26 seeking refund of the § 6707A penalties paid for 2015 under §§ 7422(a) and 1346(a)(1). 27 See Doc. 1, Govig & Assocs., Inc. v. United States, No. CV-20-02278-PHX-DLR (“Govig 28 II”). The United States agreed that the company, Todd, and Richard were entitled to 1 refunds because they had not participated in a listed transaction in 2015 and had filed 2 administrative refund claims before filing suit. See Doc. 19. Jeanette was not entitled to 3 a refund because she had filed no administrative claim. See id. The district judge in the 4 second lawsuit entered a stipulated judgment in May 2021. See Doc. 20. 5 In March 2022, the United States Court of Appeals for the Sixth Circuit found 6 Notice 2007-83 unlawful because the IRS “did not satisfy the notice-and-comment 7 procedures for promulgating legislative rules under the APA.” Mann Constr., Inc. v. 8 United States, 27 F.4th 1138, 1148 (6th Cir. 2022). Plaintiffs then filed this third lawsuit 9 in April 2022. 10 Plaintiffs characterize this as an action “to set aside final agency action, namely 11 Notice 2007-83, in accordance with the [APA], and to obtain a refund pursuant 26 U.S.C. 12 § 7422.” Doc. 1 ¶ 10. They argue that the Court has subject matter under the APA’s 13 provision that “[a] person suffering legal wrong because of agency action, or adversely 14 affected or aggrieved by agency action within the meaning of a relevant statute, is 15 entitled to judicial review.” 5 U.S.C. § 702; Doc. 1 ¶¶ 11, 48. Plaintiffs also argue that 16 the Court has subject matter jurisdiction under 28 U.S.C. § 1346(a)(1) “because this is a 17 civil action against the United States for the recovery of an internal revenue tax that was 18 erroneously assessed and collected[.]” Id. ¶ 11. 19 The complaint asserts five claims: (1) failure to follow notice-and-comment 20 procedures for Notice 2007-83 in violation of the APA; (2) unauthorized agency action in 21 violation of the APA; (3) arbitrary and capricious agency action in violation of the APA; 22 (4) refund of the § 6707A penalty Jeanette paid for 2015; and (5) declaratory judgment 23 and rescission for the additional penalties proposed against Plaintiffs for 2015-2017. Id. 24 ¶¶ 47-103. The United States moves to dismiss under Federal Rules of Civil Procedure 25 12(b)(1) and (6). Doc. 23. 26 II. The Effect of the Mann Decisions. 27 Plaintiffs claim that Notice 2007-83 was set aside nationwide by the Sixth 28 Circuit’s Mann decision. They argue that the “vacatur nullified the Notice” – that it “was 1 unwound as if it never existed.” Doc. 42 at 5. As a result, Plaintiffs claim, they can 2 prevail on the merits of this case with no need to prove the Notice unlawful. Although 3 this argument does not bear directly on the question to be decided here – whether 4 Plaintiffs’ claims fail for lack of jurisdiction, issue preclusion, or tardiness – it arises 5 repeatedly in Plaintiffs’ arguments and therefore will be addressed at the outset. 6 The Sixth Circuit did say that “[b]ecause the IRS’s process for issuing Notice 7 2007-83 did not satisfy the notice-and-comment procedures for promulgating legislative 8 rules under the APA, we must set it aside.” Mann, 27 F.4th at 1148. But the court said 9 nothing about the scope of its ruling – whether it was setting aside the Notice for 10 purposes of the case before it or for all purposes, everywhere. 11 Approximately one month after Mann was issued, the opinion’s author, Chief 12 Judge Jeffrey Sutton, said this in another Sixth Circuit case: 13 I am not the first to question nationwide (or universal) injunctions (or 14 remedies) that bar the federal government from enforcing a law or regulation anywhere and against anyone. . . . Such injunctions create 15 practical problems[.] The effect of them is to prevent the National 16 Government from enforcing a rule or executive order without (potentially) having to prevail in all 94 district courts and all 12 regional courts of 17 appeals. They incentivize forum shopping. They short-circuit the decisionmaking benefits of having different courts weigh in on vexing 18 questions of law and allowing the best ideas to percolate to the top. . . . 19 The Administrative Procedure Act, it is true, says that a reviewing court may 20 “hold unlawful and set aside” agency actions that violate the law. 5 U.S.C. 21 § 706(2). But that raises a question; it does not answer it. The question is whether Congress meant to upset the bedrock practice of case-by-case 22 judgments with respect to the parties in each case or create a new and 23 far-reaching power through this unremarkable language. . . . Use of the “setting aside” language does not seem to tell us one way or another whether 24 to nullify illegal administrative action or not to enforce it in the case with the 25 named litigants. For that reason, I would be inclined to stand by the long- understood view of equity – that courts issue judgments that bind the parties 26 in each case over whom they have personal jurisdiction. 27 28 1 Arizona v. Biden, 31 F.4th 469, 483-84 (6th Cir. 2022) (Sutton, C.J., concurring; citations 2 omitted). If Chief Judge Sutton harbors such doubts about whether a judicial set-aside 3 under the APA affects only the parties before the court or has broader effect, this Court 4 certainly cannot conclude that he intended Mann to vacate the Notice nationwide without 5 even addressing the issue.2 6 The Michigan district court judge in Mann had the same view. When the case 7 returned to him on remand, the judge thought he needed to decide whether the Notice 8 should be set aside nationwide. See Mann Constr., Inc. v. United States, No. 1:20-CV- 9 11307, 2023 WL 248814, at *1-3 (E.D. Mich. Jan. 18, 2023). The judge correctly noted 10 that this issue was “not expressly addressed by the Sixth Circuit[.]” Id. at *2. 11 The district judge found that the Notice should be vacated nationwide. Id. at *3. 12 The Court does not agree with Plaintiff’s contention, however, that his order fully 13 extinguishes the Notice everywhere else. It appears that no party before the Michigan 14 district court sought to have the notice set aside. The plaintiffs in that case specifically 15 agreed that their complaint “was not intended to seek an injunction against the IRS or a 16 declaratory judgment that would bind the IRS as to other taxpayers.” Doc. 30 at 10-11 17 (quoting Doc. 60 at 1, Mann Constr., Inc. v. United States, No. 2:20-cv-11032 (E.D. 18 Mich. 2021)); see also Mann Constr., Inc. v. United States, 539 F. Supp. 3d 745, 755 19 (E.D. Mich. 2021) (explaining that the plaintiffs “concurred in the dismissal of any claim 20 for injunctive or declaratory relief, so the only claim for relief remaining was for a 21 judgment awarding damages in the amount of the 6707A penalty assessed for [tax year] 22 2013”). This point was made to the district judge on remand, but he concluded that the 23 Notice should be vacated even if no party sought that relief: 24 The APA requires reviewing courts to “set aside” or to vacate any unlawful 25 regulation. 5 U.S.C. § 706(2). This vacatur requirement exists regardless of whether Plaintiffs seek it. Thus, even if Plaintiffs “forfeited” their claim 26 27 2 Plaintiffs argue that the Ninth Circuit has recognized the power of federal courts to vacate agency regulations nationwide. Doc. 42 at 6-7. But the question here is not 28 what the Ninth Circuit has authorized, but what the Sixth Circuit did in Mann. for declaratory relief, this Court may not ignore the edict of Congress: that 1 is, that courts “shall” set aside any rule passed without notice and comment 2 that Congress did not expressly exclude from the notice-and-comment requirements. 5 U.S.C. § 706(2). 3 4 Id. at 3 (citation and emphasis omitted). 5 A decision not requested by the parties and not required to accord full relief 6 between them is dictum. See Lions Club of Albany, California v. City of Albany, No. C 7 17-05236 WHA, 2022 WL 17072021, at *2 (N.D. Cal. Nov. 17, 2022) (explaining that 8 the court’s discussion in a prior case was “dictum [that] could not be deemed to be an 9 order . . . because there was no one in the prior case asking for such relief”); In re Motors 10 Liquidation Co., 619 B.R. 63, 72 (Bankr. S.D.N.Y. 2020) (“[B]ecause plaintiffs had not 11 sought relief from the GUC Trust, any so-called ‘finding’ with respect to claims against 12 the GUC Trust was entirely ‘unnecessary to the disposition of the case’ and was therefore 13 dictum.”). And dictum is not binding on other courts. See Hachicho v. McAleenan, No. 14 EDCV 19-820-VAP (KK), 2019 WL 5483414, at *7 (C.D. Cal. Oct. 18, 2019) (noting 15 that “statements not necessary to a decision are dicta and have no binding or precedential 16 impact”) (citing Exp. Grp. v. Reef Indus., Inc., 54 F.3d 1466, 1472 (9th Cir. 1995)); see 17 also Advsr, LLC v. Magisto Ltd., No. 19-CV-02670-JCS, 2020 WL 978610, at *8 (N.D. 18 Cal. Feb. 28, 2020) (“Excepting narrow doctrines of estoppel and law of the case, no 19 district court decision binds any court (or even the issuing court) in future cases[.]”). 20 This Court finds that the circuit and district court decisions in Mann cannot fairly 21 be read as having nationwide scope. As a result, the Court will not treat Notice 2007-83 22 as a legal nullity. 23 III. Rule 12(b)(1) and (6) Standards. 24 Federal courts have limited jurisdiction, “possess[ing] only that power authorized 25 by Constitution and statute[.]” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 26 377 (1994). When jurisdiction is challenged in a Rule 12(b)(1) motion, it is “presumed 27 that [the claim] lies outside this limited jurisdiction, and the burden of establishing the 28 contrary rests upon the party asserting jurisdiction[.]” Id. (citations omitted). To show 1 jurisdiction over a claim against the United States and its agencies, the plaintiff must 2 allege both “statutory authority granting subject matter jurisdiction over the claim” and “a 3 waiver of sovereign immunity.” E.J. Friedman Co. v. United States, 6 F.3d 1355, 1357 4 (9th Cir. 1993) (citation omitted). A court must accept the complaint’s allegations as true 5 and draw all reasonable inferences in the plaintiff’s favor. Leite v. Crane Co., 749 F.3d 6 1117, 1121 (9th Cir. 2014). 7 Rule 12(b)(6) allows a defendant to challenge the factual and legal sufficiency of a 8 claim before discovery. A complaint that pleads a cognizable legal theory will survive 9 Rule 12(b)(6) review if it contains “sufficient factual matter, accepted as true, to ‘state a 10 claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 11 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)). The complaint’s factual 12 allegations are taken as true and construed in the light most favorable to the plaintiff. 13 Twombly, 550 U.S. at 556. 14 IV. The United States’ Motion to Dismiss. 15 A. The AIA and the DJA’s Tax Exception. 16 The AIA and the DJA’s tax exception are congressionally imposed limitations on 17 the Court’s jurisdiction. See Govig I, 2020 WL 6048301, at *3. With certain exceptions 18 not relevant here, the AIA provides that “no suit for the purpose of restraining the 19 assessment or collection of any tax shall be maintained in any court by any person[.]” 26 20 U.S.C. § 7421(a). Under the DJA, federal courts may issue declaratory judgments 21 “except with respect to Federal taxes[.]” 28 U.S.C. § 2201(a). Together, these provisions 22 “deprive the Court of subject matter jurisdiction to hear injunctive or declaratory claims 23 regarding taxes.” Ridley v. United States, No. 3:20-CV-11439, 2022 WL 351072, at *7 24 (E.D. Mich. Jan. 12, 2022); see George v. United States, No. 5:21-CV-01187-EJD, 2022 25 WL 562758, at *2 (N.D. Cal. Feb. 24, 2022) (“The DJA is coextensive with the AIA – if 26 a suit is not allowed under the AIA, it is barred by the DJA.”) (citing Perlowin v. Sassi, 27 711 F.2d 910, 911 (9th Cir. 1983)); Freedom Path, Inc. v. Lerner, No. 3:14-CV-1537-D, 28 2016 WL 3015392, at *6 (N.D. Tex. May 25, 2016) (same). 1 Except for Jeanette’s refund claim in count four, the United States contends that 2 the Court lacks jurisdiction over Plaintiffs’ claims because they seek to restrain the IRS 3 from assessing and collecting taxes and such relief is barred by the AIA and DJA. 4 Doc. 23 at 6-7, 14-19. The government further argues that the Supreme Court’s recent 5 decision regarding the AIA’s scope, CIC Services, LLC v. IRS, 141 S. Ct. 1582 (2021), 6 confirms that the AIA bars suits like this one. Id. Plaintiffs respond that this suit 7 challenges the reporting requirement imposed by Notice 2007-83 and the Supreme 8 Court’s holding in CIC Services makes clear that the AIA does not prohibit APA 9 challenges to an information-reporting requirement. Doc. 27 at 2-3, 10-13. 10 1. CIC Services. 11 In CIC Services, an advisor to taxpayers who were participating in insurance 12 agreements known as “micro-captive transactions” sued the IRS to enjoin enforcement of 13 IRS Notice 2016-66, which required advisors to report information about micro-captive 14 transactions and subjected them to § 6707A penalties and potential criminal liability for 15 noncompliance. The advisor claimed the notice violated the APA. The district court 16 found that the advisor actually sought to restrain the IRS’s assessment and collection of a 17 tax and dismissed for the case for lack of jurisdiction under the AIA. CIC Servs., LLC v. 18 IRS, No. 3:17-CV-110, 2017 WL 5015510, at *4 (E.D. Tenn. Nov. 2, 2017). The Sixth 19 Circuit affirmed, holding that the suit sought to “restrain (and indeed eliminate)” the tax 20 penalty by “invalidat[ing] the Notice, which is [the tax’s] entire basis.” CIC Services, 21 LLC v. IRS, 925 F.3d 247, 255 (6th Cir. 2019). 22 The Supreme Court reversed. It held that the AIA does not prohibit “a suit 23 seeking to set aside an information-reporting requirement that is backed by both civil tax 24 penalties and criminal penalties.” CIC Servs., 141 S. Ct. at 1586. The key issue was 25 whether the suit was brought for the purpose of restraining the assessment or collection of 26 a tax in violation of the AIA. Id. at 1588. The Court explained that if the “downstream” 27 tax penalty in § 6707A did not exist, the “case would be a cinch: The [AIA] would not 28 apply and the suit could proceed [because a] reporting requirement is not a tax[] and a 1 suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection.” 2 Id. at 1588-89 (citing Direct Mktg. Ass’n v. Brohl, 575 U.S. 1, 9-10 (2015)). 3 The complication arose from the fact that Notice 2016-66’s reporting obligations 4 “are backed up by a statutory tax penalty.” Id. at 1589. The question, then, was whether 5 that added tax penalty “mean[s] that CIC’s suit is, as the [AIA] provides, ‘for the purpose 6 of restraining the assessment or collection of any tax[.]’” Id. The Supreme Court 7 provided guidance for determining a suit’s purpose in this context: 8 [W]e inquire not into a taxpayer’s subjective motive, but into the action’s 9 objective aim – essentially, the relief the suit requests. . . . The purpose of a measure is “the end or aim to which [it] is directed.” And in this context, 10 that aim is not best assessed by probing an individual taxpayer’s innermost 11 reasons for suing. Down that path lies too much potential for circumventing the [AIA]. Instead, this Court has looked to the face of the taxpayer’s 12 complaint . . . [and] “the substance of the suit” – the claims brought and injuries alleged – to determine the suit’s object. And most especially, we 13 have looked to the “relief requested” – the thing sought to be enjoined. 14 Id. at 1589-90 (citations omitted). 15 The advisor’s complaint in CIC Services was brought before the IRS report was 16 due and before any penalty had been assessed. It claimed that the IRS violated the APA 17 by issuing Notice 2016-66 without notice-and-comment procedures and that the notice 18 was arbitrary and capricious because it imposed new reporting requirements without 19 proven need. See id. at 1588, 1590 (citations omitted). The relief requested was “setting 20 aside IRS Notice 2016-66,” “enjoining the enforcement of Notice 2016-66 as an unlawful 21 IRS rule,” and “declaring that Notice 2016-66 is unlawful.” Id. (citations and brackets 22 omitted). The advisor argued that this request revealed the suit’s true aim: invalidating 23 the notice and thereby eliminating its reporting requirements. See id. at 1590. The 24 government countered that the ultimate purpose was to stop collection of the tax itself. 25 Id. It argued that avoiding the burdens of complying with the notice and avoiding the tax 26 penalties for noncompliance are “two sides of the same coin.” Id. 27 28 1 The Supreme Court found that the “complaint, and particularly its request for 2 relief, sets out [the] suit’s purpose as enjoining the Notice” and “not to block the 3 application of a penalty that might be imposed for some yet-to-happen violation.” Id. 4 (citing 5 U.S.C. § 706). The Court held that the suit fell “outside the [AIA] because the 5 injunction” that it sought did not “run against a tax at all.” Id. at 1593. Instead, the “tax 6 functions, alongside criminal penalties, only as a sanction for noncompliance with the 7 [Notice’s] reporting obligation.” Id. at 1594. 8 The Court rejected the government’s argument that “an injunction against the 9 Notice is the same as one against the tax penalty – just ‘two sides of the same coin.’” Id. 10 at 1590. Three aspects of the regulatory scheme led to this rejection. 11 First, the Notice “levies no tax” and instead “imposes affirmative reporting 12 obligations, inflicting costs separate and apart from the statutory tax penalty.” Id. By 13 challenging the legality of the Notice, the advisor sought “to get out from under the (non- 14 tax) burdens of a (non-tax) reporting obligation.” Id. at 1591. Although CIC would 15 never have to worry about the downstream tax penalty if its suit succeeded, that was “the 16 suit’s after-effect, not its substance. The suit still target[ed] the reporting mandates . . . of 17 the Notice itself.” Id. 18 Second, the Notice’s reporting rule and the statutory tax penalty were several steps 19 removed from each other. Id. As already noted, no tax penalty had been assessed. 20 Third, violation of the Notice was punishable not only by a civil tax but also by 21 criminal penalties. Id. at 1591-92 (citing 26 U.S.C. § 7203). “That fact clinches the case 22 for treating a suit brought to set aside the Notice as different from one brought to restrain 23 its back-up tax.” Id. at 1592. 24 2. Plaintiffs’ Suit. 25 In ruling on the government’s motion, the Court must conduct its “jurisdictional 26 analysis on a claim-by-claim basis[.]” Martinez v. Clark, 36 F.4th 1219, 1226 (9th Cir. 27 2022); see U.S. ex rel. Boothe v. Sun Healthcare Grp., Inc., 496 F.3d 1169, 1176 (10th 28 Cir. 2007) (“each claim in a multi-claim complaint must be treated as if it stood alone”); 1 Winnemem Wintu Tribe v. U.S. Dep’t of Interior, 725 F. Supp. 2d 1119, 1136 (E.D. Cal. 2 2010) (“the court analyzes plaintiffs’ APA allegations on a claim-by-claim basis.”). The 3 Court will review each of the complaint’s five claims separately. 4 a. Count One – APA Notice and Comment Claim. 5 Count one alleges that the IRS violated the notice-and-comment requirements of 6 the APA when it issued Notice 2007-83. Doc. 1 ¶¶ 47-61. It alleges that under the APA, 7 “‘rules’ promulgated by an agency must be published in accordance with notice-and- 8 comment procedures.” Id. ¶ 47 (citing 5 U.S.C. § 553). “An agency’s failure to comply 9 with the mandated notice-and-comment procedures is grounds for invalidating the rule.” 10 Id. The APA permits a court to set aside agency action taken “without observance of 11 procedure required by law[.]” 5 U.S.C. § 706(2)(D). Count one says nothing about the 12 penalties assessed against Plaintiffs or recission of those penalties. 13 Count one falls within the Supreme Court’s holding in CIC Services – it meets 14 each of the three factors identified by the Court as distinguishing CIC Services from cases 15 seeking to restrain the assessment and collection of a tax within the meaning of the AIA. 16 First, count one challenges an IRS Notice that imposes “affirmative reporting 17 obligations” and inflicts “costs separate and apart from the statutory tax penalty.” CIC 18 Services, 141 S. Ct. at 1591. Second “the Notice’s reporting rule and the statutory tax 19 penalty are several steps removed from each other.” Id. As in CIC Services, no penalty 20 had been assessed in this case against the company, Todd, or Richard when this lawsuit 21 was filed.3 “Third, violation of the Notice is punishable not only by a tax but by separate 22 criminal penalties.” CIC Services, 141 S. Ct. at 1592. 23 24 25 3 The government stated during oral argument that penalties for years 2016 and 2017 were assessed against Plaintiffs in September 2022, and it has now submitted tax 26 transcripts purportedly reflecting those assessments. Doc. 44. But count one clearly was brought before any penalties were owed. Although this was closer in time than the 27 possible penalties in CIC Services, it remains true that the APA claim in count one was not brought in response to an existing tax obligation, distinguishing it from many tax- 28 rescission claims that are barred by the AIA. 1 The government focuses on the fact that the complaint’s prayer for relief includes 2 a request not only to set aside the Notice, but also to rescind any penalties that might be 3 assessed against Plaintiffs for the years 2015-2017. See Doc. 1 at 15. This is correct, but 4 the only count in the complaint that mentions tax penalties or their rescission is count 5 five. Id. ¶¶ 100, 103. Count one mentions neither – it focuses solely on the invalidity of 6 Notice 2007-83 for failure to comply with APA procedures. The Court accordingly 7 construes the complaint and count one (as well as counts two and three discussed below) 8 as seeking set-aside of the Notice, not rescission of threatened penalties. So construed, 9 count one falls squarely within the holding of CIC Services. 10 The United States asserted at oral argument that this conclusion will eviscerate the 11 AIA by permitting a flood of tax-related cases. Not so. Actions permitted by CIC 12 Services are limited to (1) lawsuits challenging an information-gathering notice that 13 imposes affirmative reporting obligation and inflicts costs separate and apart from the 14 statutory tax penalty, (2) when the notice and the statutory tax penalty are several steps 15 removed from each other, and (3) when violation of the notice is punishable not only by a 16 tax but by separate criminal penalties. 141 S. Ct. at 1591-92. This appears to be a fairly 17 narrow group of cases. 18 Quoting language from CIC Services, the United States argues that Plaintiffs stand 19 at the “cusp of tax liability” because they failed to comply with the Notice’s reporting 20 requirement and the IRS proposed § 6707A penalties against them. Docs. 23 at 17-18, 30 21 at 7 (quoting CIC Services 141 S. Ct. at 1591). But it is count five, not count one, that 22 addresses Plaintiffs’ possible penalties and their rescission. Count one focuses solely on 23 the IRS’s alleged failure to follow APA procedures when it promulgated Notice. And 24 count one was brought before any tax penalty had been assessed. 25 The United States notes that tax advisors like the plaintiff in CIC Services incur 26 significant costs in complying with a notice’s reporting requirements and those costs may 27 be greater than any potential tax liability the taxpayer may face. Doc. 23 at 18 (citing 28 CIC Services, 141 S. Ct. at 1594-95 (Sotomayor, J., concurring)). The government 1 argues that Plaintiffs in this case face no similar reporting burden under Notice 2007-83 2 and their suit does not seek relief from such a burden. Id. But the complaint’s 3 allegations must be accepted as true at this stage, and they assert that Notice 2007-83 4 requires Plaintiffs to “engage in the costly, time-consuming expense of completing a 5 Form 8886.” Doc. 1 ¶ 18. Plaintiffs seek an order that the Govig trust “is not subject to 6 the reporting requirements of Notice 2007-83[.]” Id. at 15. Thus, although Plaintiffs are 7 taxpayers rather than tax advisors, they seek relief from the Notice’s reporting 8 requirement and resulting compliance costs. Id. ¶¶ 18, 54, 70, 77.4 What is more, 9 Plaintiffs’ failure to comply with the reporting requirement subjects them to potential 10 criminal penalties under § 7203, a fact that “clinches the case” for treating count one as a 11 claim to set aside the Notice and not to restrain its back-up tax. CIC Services, 141 S. Ct. 12 at 1592. 13 The United States cites several cases to show that this action falls outside the 14 holding of CIC Services. Docs. 30 at 7, 33 at 2. The cases are inapposite. 15 In Hancock County Land Acquisitions, LLC v. United States, No. 21-12508, 2022 16 WL 3449525 (11th Cir. Aug. 17, 2022), the plaintiff sought to prevent the IRS from 17 issuing a deficiency notice alleging that the plaintiff had improperly claimed a $180 18 million deduction on its 2016 return, resulting in an underpayment of taxes. 2022 WL 19 3449525, at *2. The Eleventh Circuit found that because the relief sought “would 20 restrain the IRS from assessing and collecting those taxes, it [was] barred by the AIA.” 21 Id. The Eleventh Circuit emphasized that, “[u]nlike in CIC Services, the ‘legal rule at 22 23 4 Writing separately in CIC Services, Justice Sotomayor stated that the result in that case might be different if CIC were a taxpayer because “a tax on noncompliance may 24 operate as a rough substitute for the tax liability [the taxpayer] has evaded by withholding required information[.]” 141 S. Ct. at 1594. Compared with tax advisors, “taxpayers may 25 incur less expense in collecting and reporting their own financial information.” 141 S. Ct. at 1594. But this distinction was not addressed in the Court’s holding, and Justice 26 Sotomayor acknowledged that the case provided “no occasion for the Court to inquire into the full quantity or variety of IRS reporting requirements that are backed by tax 27 penalties, nor to predetermine whether the AIA would allow hypothetical taxpayers to challenge those requirements in court.” Id. at 1595. The holding of CIC Services, not 28 these concurring thoughts about possible future cases, must control the Court’s decision. 1 issue’ [was] a tax provision, not a reporting requirement backed up with a tax provision.” 2 Id. (quoting CIC Services, 141 S. Ct. 1593). Hancock does not apply here because 3 Plaintiffs challenge the reporting requirement in Notice 2007-83. 4 In Harper v. Rettig, 46 F.4th 1 (1st Cir. 2022), the IRS had obtained information 5 on the plaintiff’s virtual currency accounts through a third-party summons. 46 F.4th at 6 2-4. The plaintiff sought injunctive relief requiring the IRS to expunge that information 7 from its records. Id. at 5. Relying on CIC Services, the First Circuit held that the AIA 8 did not bar the claim because it targeted “the IRS’s continued retention of [the plaintiff’s] 9 personal financial information” as opposed to a tax. Id. at 8. Harper undermines 10 Plaintiffs’ position, the United States contends, because Plaintiffs “face a specific 11 proposed tax assessment and plainly seek to restrain that assessment and collection on it.” 12 Doc. 30 at 7. But count one asserts an APA procedural challenge to the Notice 2007-83. 13 It does not address any tax penalties or their rescission. 14 The United States’ citation to Franklin v. United States, 49 F.4th 429 (5th Cir. 15 2022), is also not helpful. Doc. 33 at 2. The plaintiff in that case did not challenge a 16 standalone reporting requirement like Notice 2007-83. He instead challenged the IRS’s 17 assessment of tax penalties based on an alleged procedural failure under 26 U.S.C. 18 § 6751(b), which requires that penalties be approved in writing by a supervisor of the 19 determining agent. Franklin, 49 F.4th at 432-33. The Fifth Circuit affirmed dismissal 20 under the AIA because the claims “challenge[d] the validity of the tax assessment itself.” 21 Id. at 434. The Fifth Circuit made clear that its holding was consistent with CIC 22 Services, explaining that while a “challenge to reporting requirements backed by a tax 23 penalty can proceed” – the very case we have here – “a challenge to the assessment or 24 collection of a tax itself is still barred.” Id. (citing CIC Services, 141 S. Ct. at 1588-89). 25 The United States’ citation to Silver v. IRS, No. CV 20-1544 (CKK), 2022 WL 26 16744921 (D.D.C. Nov. 7, 2022), is unhelpful as well. Doc. 33 at 2. The case challenged 27 regulations effecting the 2017 Tax Cuts and Jobs Act, which changed the tax rate that a 28 shareholder pays on the earnings of a foreign corporation if those earnings are repatriated 1 to the United States. 2022 WL 16744921, at *1-2 (citations omitted). Because the 2 “regulations define how [the tax-rate] is calculated, they determine, in part, the ultimate 3 amount of tax paid.” Id. at *2. The district court concluded that the AIA barred the suit 4 because the plaintiffs aimed “to interrupt a tax rule governing who pays what amount of 5 tax,” not an information-gathering notice. Id. at *3. 6 Finally, the government argues that the possible imposition of misdemeanor 7 criminal liability for violation of Notice 2007-83 does not bring this case within the 8 holding of CIC Services because Plaintiffs in this case, unlike the plaintiff in CIC 9 Services, have already violated the Notice and therefore already face criminal liability. 10 Doc. 23 at 19. The government also argues that Plaintiffs fail to allege an imminent risk 11 of criminal prosecution. Id. at 19 n.5. But potential criminal penalties were relevant in 12 CIC Services because they necessitated bringing a pre-enforcement case to set aside the 13 allegedly unlawful notice. The usual route for contesting taxes would not protect the 14 plaintiff from criminal liability. The plaintiff would have to disobey the reporting 15 requirement, suffer the imposition of a penalty, pay the penalty under protest, and then 16 file suit for refund of the penalty. This procedure might set up a tax refund claim, but it 17 would not protect the plaintiff from criminal liability for violating the notice. CIC 18 Services, 141 S. Ct. at 1592 & n.3. “So the criminal penalties here practically necessitate 19 a pre-enforcement, rather than a refund, suit[.]” Id. at 1592. And the Supreme Court did 20 not say that criminal prosecution must be imminent before an APA challenge can be 21 brought. 22 b. Count Two – APA Unauthorized Agency Action Claim. 23 The Court reaches the same conclusion with respect to count two. Doc. 1 24 ¶¶ 65-80. This count also focuses solely on the validity of Notice 2007-83. It asserts that 25 the IRS acted without authorization when it issued Notice 2007-83 because the notice 26 fails to describe the listed transactions with the specificity required by 26 U.S.C. 27 § 6707A(c)(2). Id. ¶¶ 68-71. The APA authorizes a court to set aside agency action that 28 exceeds “statutory jurisdiction, authority, or limitations[.]” 5 U.S.C. § 706(2)(C). Count 1 two alleges that the notice, if not set aside, “will continue to cause undue confusion and 2 improperly and unnecessarily require Plaintiffs and other taxpayers to file a Form 8886.” 3 Doc. 1 ¶ 77. Count two does not mention the penalties assessed against Plaintiffs or seek 4 their rescission. 5 Because count two challenges only Notice 2007-83 and its reporting requirement, 6 the count is not barred by the AIA or the DJA. As CIC Services held, “[a] reporting 7 requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a 8 tax’s assessment or collection.” 141 S. Ct. at 1588-89; see also Harper, 46 F.4th at 8 9 (“Because appellant’s suit challenges the IRS’s information-gathering authority and the 10 [AIA] limits our jurisdiction only in suits involving assessment and collection, the [AIA] 11 is not an applicable exception to the United States’ waiver of sovereign immunity in 12 5 U.S.C. § 702.”) (citing CIC Services, 141 S. Ct. at 1588-89). 13 c. Count Three – APA Arbitrary and Capricious Claim. 14 The same holds true for count three. Doc. 1 ¶¶ 81-88. The count alleges that the 15 IRS acted arbitrarily and capriciously when it issued Notice 2007-83 because it failed to 16 provide adequate reasons for the Notice and failed to permit public comment. Doc. 1 17 ¶¶ 84-85. The APA permits a court to set aside agency action that is “arbitrary, 18 capricious, an abuse of discretion, or otherwise not in accordance with law[.]” 5 U.S.C. 19 § 706(2)(A). Count three asks that the Notice be set aside under the APA and never 20 mentions the penalties against Plaintiffs. Id. ¶ 88. Under CIC Services, it is not barred 21 by the AIA or DJA.5 22 d. Count Four – Jeanette’s Refund Claim. 23 Count four alleges that Jeanette is entitled to a refund of the $29,111.26 tax 24 penalty she paid for 2015 based on the stipulated judgment in Govig II and her 25 administrative request for a refund through the filing of Form 843 in March 2021. Id. 26 5 Given the Court’s conclusion that the AIA and DJA do not bar counts one 27 through three under CIC Services, the Court need not address the government’s additional argument that specific exceptions to the AIA and DJA do not apply here. 28 Doc. 23 at 19. The Court is not relying on those exceptions. 1 ¶¶ 90-95. Because Jeanette has exhausted her administrative remedies, see § 7422(a), the 2 Court has jurisdiction over this refund claim under § 1346(a)(1). See Doc. 23 at 6-7, 14; 3 United States v. Williams, 514 U.S. 527, 536 (1995) (“§ 1346(a)(1) clearly allows one 4 from whom taxes are erroneously or illegally collected to sue for a refund of those 5 taxes”). 6 The United States argues that count four is moot because the IRS has granted 7 Jeanette’s administrative refund claim. Docs. 23 at 14, 30 at 12. It asserts that the IRS 8 granted her request for a refund of the 2015 penalty in September 2022, and then 9 immediately credited that amount to a 2016 penalty it recently assessed against her. No 10 funds were returned to Jeanette. Doc. 33 at 2 11 The United States does not explain how the Court can dispose of count four on a 12 motion to dismiss which is confined to analysis of the pleadings, and cites no legal 13 authority to show that the processing of the claim renders Jeanette’s APA challenges to 14 Notice 2007-83 moot. See id.; see also Hooks for & on Behalf of NLRB v. Nexstar 15 Broad., Inc., 54 F.4th 1101, 1112 (9th Cir. 2022) (applying the “exception to mootness 16 for disputes that are ‘capable of repetition, yet evading review’”). In addition, Plaintiffs 17 made clear in oral argument that (1) they dispute the admissibility of the unauthenticated 18 notice provided by the government to show the refund, (2) Jeanette’s 2016 assessment 19 (which apparently came after the 2015 refund was processed) does not say that the 2015 20 penalty has been applied to 2016, and (3) accrued interest and other issues might need to 21 be resolved as part of count four. Given these factual complexities, the Court cannot find 22 at this stage that count four is fully moot. 23 What is more, because Jeanette asserts a procedurally sound refund claim, she 24 remains able to challenge the legality of Notice 2007-83 in counts one through three. 25 Those challenges are not barred by the AIA or the DJA. See CIC Services, 141 S. Ct. at 26 1588 (“CIC could contest the legality of the reporting rules . . . by violating them and 27 suing for a refund of a later tax penalty”); Bob Jones Univ. v. Simon, 416 U.S. 725, 746 28 (1974) (refund suits offer taxpayers a full opportunity to litigate the legality of IRS 1 decisions); Mann Constr., 27 F.4th at 1142-48 (considering the plaintiffs’ APA challenge 2 to Notice 2007-83 in a refund suit); see also Motion to Dismiss, Doc. 23 at 7 n.2 3 (explaining that because the plaintiffs in Mann “made their APA arguments in the context 4 of a refund claim, the AIA and DJA did not bar the action”). The Court still must decide, 5 however, whether Jeanette’s assertion of counts one through three are time-barred, as 6 addressed below. 7 e. Count Five – DJA Claim for Rescission of Tax Penalties. 8 Count five alleges that because Notice 2007-83 was promulgated in violation of 9 the APA, the IRS “continues to act unlawfully by its failure and/or refusal to rescind 10 penalties assessed against Plaintiffs in 2015-2017.” Doc. 1 ¶¶ 99-100. The count seeks 11 to have the tax penalties rescinded and asks for “a declaratory judgment providing for this 12 specific remedy.” Id. ¶ 103; see id. at 15 (requesting an order requiring the IRS to 13 “rescind the § 6707A penalties assessed on Plaintiffs in 2020 with respect to Tax Years 14 2015-2017”). 15 Because count five specifically seeks to prevent the IRS from assessing and 16 collecting tax penalties, it is barred by the AIA and DJA. 26 U.S.C. § 7421(a); 28 U.S.C. 17 § 2201(a); George, 2022 WL 562758, at *3 (“Plaintiff seeks to restrain the assessment of 18 section 6702 penalties, which . . . are ‘taxes’ contained in Subchapter 68B. The AIA and 19 DJA bar this suit.”); Ridley, 2022 WL 351072, at *8 (“Unlike CIC Services, Ridley does 20 not seek to enjoin ‘a standalone reporting requirement, whose violation may result in both 21 tax penalties and criminal punishment.’ Rather, in Count V he asks the Court to ‘stop 22 further collections actions until this case is resolved.’ This is a clear challenge to a tax 23 that is barred by the [AIA], and nothing in CIC Services holds otherwise.”) (citations 24 omitted). 25 Plaintiffs contend that there are no grounds to dismiss count five because the 26 “Sixth Circuit’s vacatur of Notice 2007-83 applies to all regulated parties – not just the 27 plaintiffs in Mann.” Doc. 27 at 5-6. The Court has rejected this argument above. Nor do 28 1 Plaintiffs explain how the Sixth Circuit’s ruling on the merits would solve the 2 jurisdictional issue presented here. 3 Plaintiffs further contend that the Williams Packing exception to the AIA applies. 4 Doc. 27 at 9-10 (citing Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1 5 (1962)). Under this narrow exception, the AIA does not bar a tax suit “if it is clear that 6 under no circumstances could the [g]overnment ultimately prevail . . . [and] if equity 7 jurisdiction otherwise exists.” Williams Packing, 370 U.S. at 7; see Stonecipher v. Bray, 8 653 F.2d 398, 401 (9th Cir. 1981) (setting forth the exception’s two-part test). “‘Only if 9 it is . . . manifest, under the most liberal view of the law and the facts, that the 10 government cannot [prevail]’ is the first part of the test satisfied.” Church of Scientology 11 of Cal. v. United States, 920 F.2d 1481, 1486 (9th Cir. 1990) (citation omitted). The 12 burden of showing that the government’s position is baseless is on the taxpayers. See id. 13 Plaintiffs have not met their burden. They argue that the United States cannot 14 prevail because Notice 2007-83 “no longer exists” after Mann. Doc. 27 at 6, 9. The 15 Court has not accepted this assertion. 16 Because Plaintiffs have not shown that the United States has no chance of 17 prevailing, the Williams Packing exception does not apply and count five must be 18 dismissed under the AIA. See 370 U.S. at 7-8. The Court need not address the second 19 part of the Williams Packing test – whether “equity jurisdiction otherwise exists.” Id. 20 at 7.6 21 B. Issue Preclusion. 22 The United States contends that issue preclusion bars Plaintiffs’ APA claims 23 because the district court in Govig I dismissed identical claims. Doc. 23 at 25. But even 24 when the elements of issue preclusion are met, an exception applies “if there has been an 25 26 6 Plaintiffs have filed a notice of supplemental authority regarding the effect of court decisions vacating an agency rule. Doc. 31. The United States moves for leave to 27 respond or strike the arguments made in the notice. Doc. 32. The government’s motion will be denied because Plaintiff’s supplemental arguments do not change the Court’s 28 analysis. 1 intervening ‘change in the applicable legal context.’” Herrera v. Wyoming, 139 S. Ct. 2 1686, 1697 (2019) (quoting Bobby v. Bies, 556 U.S. 825, 834 (2009) (cleaned up)). “The 3 change-in-law exception recognizes that applying issue preclusion in changed 4 circumstances may not ‘advance the equitable administration of the law.’” Id. (quoting 5 Bobby, 556 U.S. at 836-37); see Snoqualmie Indian Tribe v. Washington, 8 F.4th 853, 6 867 (9th Cir. 2021) (explaining that issue preclusion does not apply where “a new 7 determination is warranted in order to take account of an intervening change in the 8 applicable legal context or otherwise to avoid inequitable administration of the laws”) 9 (quoting Restatement (Second) of Judgments § 28 (1982)). 10 Plaintiffs contend that the Supreme Court’s decision in CIC Services constitutes an 11 intervening change in the law. Doc. 27 at 13-14. The Court agrees. 12 Before CIC Services, the Supreme Court embraced a broad and straightforward 13 rule for determining whether a suit is barred by the AIA. See Bob Jones, 416 U.S. 725 14 (1974); Alexander v. “Americans United” Inc., 416 U.S. 752 (1974). The AIA barred 15 any suit that would “necessarily preclude” the assessment or collection of a tax. Bob 16 Jones, 416 U.S. at 732; see Americans United, 416 U.S. at 760-61. Bob Jones and 17 Americans United instructed courts to look to the effect of a suit. If the suit would 18 prevent the assessment or collection of a tax, it was barred. 19 The Sixth Circuit applied this test in holding that CIC’s suit was barred by the 20 AIA. See 925 F.3d at 256. In reversing that decision, the Supreme Court essentially 21 “carve[d] out a new exception to Americans United and Bob Jones for pre-enforcement 22 suits challenging regulations backed by tax penalties.” 141 S. Ct. at 1595 (Kavanaugh, J., 23 concurring). The Court decided “to narrow Americans United and Bob Jones because the 24 broad ‘effects’ rule articulated in those decisions is hard to square with the text of the 25 [AIA], which bars only a pre-enforcement ‘suit for the purpose of restraining the 26 assessment or collection of any tax.’” Id. 27 Govig I held that the AIA barred Plaintiffs’ claims “because the ultimate effect of 28 [the] action [was] to restrain the assessment of a penalty under § 6707A(b)[.]” 2020 WL 1 6048301, at *4 (emphasis added). This Court reaches a different conclusion in light of 2 CIC Services. Because CIC Services constitutes an intervening change in the law, the 3 United States’ issue preclusion argument lacks merit. 4 C. Jurisdiction Under the APA. 5 Plaintiffs allege that the Court has subject matter jurisdiction pursuant to the APA, 6 5 U.S.C. § 702. Id. ¶ 11. The United States correctly observes that the APA provides no 7 independent basis for subject matter jurisdiction. Doc. 23 at 26; see Allen v. Milas, 896 8 F.3d 1094, 1099 (9th Cir. 2018) (“[T]he APA waive[s] the sovereign immunity of the 9 United States, but such a waiver is on its terms neither coextensive with subject matter 10 jurisdiction nor a guarantee of a federal forum.”); Tucson Airport Auth. v. Gen. Dynamics 11 Corp., 136 F.3d 641, 645 (9th Cir. 1998) (same). But the Court clearly has subject matter 12 jurisdiction under the federal question statute, 28 U.S.C. § 1331, which provides that 13 district courts have jurisdiction over claims “arising under the Constitution, laws, or 14 treaties of the United States.” See Califano, 430 U.S. at 105 (explaining that § 1331 15 “confer[s] jurisdiction on federal courts to review agency action, regardless of whether 16 the APA of its own force may serve as a jurisdictional predicate”); Allen, 896 F.3d at 17 1099 (same); Vaz v. Neal, 33 F.4th 1131, 1135 (9th Cir. 2022) (same). Plaintiffs’ 18 complaint does not expressly allege federal question jurisdiction (see Doc. 1 ¶ 11), but 19 this omission “is not fatal since the facts alleged are sufficient to support such 20 jurisdiction.” Duke Power Co. v. Carolina Env’t Study Grp., Inc., 438 U.S. 59, 70 n.14 21 (1978). 22 The United States also contends that Plaintiffs cannot bring claims under the APA 23 because a refund suit under § 7422 would provide Plaintiffs an adequate legal remedy. 24 Doc. 23 at 26 (citing 5 U.S.C. § 704). But as construed above, Plaintiffs’ APA claims – 25 counts one through three – do not seek the refund of any tax penalty. They assert APA 26 challenges to Notice 2007-83. Doc. 1 ¶¶ 47-88. 27 Nor does the government explain how a refund suit by Plaintiffs would be an 28 adequate legal remedy for potential criminal liability. Before September 2022, when the 1 IRS finally assessed penalties for the years 2016 and 2017 (see Doc. 44), Plaintiffs had 2 no ability to pay penalties and sue for a refund. Plaintiffs thus were subject to criminal 3 liability for several years before they could challenge the validity of the assessments in a 4 refund suit. The United States has not shown that a refund suit provided Plaintiffs an 5 adequate legal remedy in these circumstances. See CIC Services, 141 S. Ct. at 1584 6 (“[T]he presence of criminal penalties forces CIC to bring an action in just this form, with 7 the requested relief framed in just this manner. The Government’s proposed alternative 8 procedure – having a party like CIC disobey the Notice and pay the resulting tax penalty 9 before bringing a suit for a refund – would risk criminal punishment.”). 10 D. Statute of Limitations. 11 1. The Six-Year Limitations Period. 12 According to 28 U.S.C. § 2401(a), “every civil action commenced against the 13 United States shall be barred unless the complaint is filed within six years after the right 14 of action first accrues.” The parties agree that this limitations period applies to APA 15 claims, but disagree on when Plaintiffs’ APA claims first accrued. The United States 16 argues that the claims accrued when Notice 2007-83 was issued in November 2007 17 because the claims allege only procedural or policy challenges to the Notice. Doc. 23 at 18 27-30. Plaintiffs argue that the claims allege substantive challenges that did not accrue 19 until the IRS applied the Notice to them in 2019. Doc. 27 at 17-19. 20 In the Ninth Circuit, two basic accrual rules exist for APA claims. 21 First, if a claim challenges the procedures the agency used in issuing a rule or the 22 policy behind the rule, the claim accrues when the rule is issued. See Sierra Club v. 23 Penfold, 857 F.2d 1307, 1316 (9th Cir. 1988) (“Sierra Club . . . [asserts] a challenge to 24 the procedural deficiencies in adoption of the regulations in October of 1987. More than 25 six years elapsed between the time the alleged procedural deficiencies occurred and the 26 time of Sierra Club’s . . . complaint. Under § 2401(a), the procedural challenge to the 27 Notice regulations [is] time-barred.”); Shiny Rock Mining Corp. v. United States, 906 28 F.2d 1362, 1365-66 (9th Cir. 1990) (explaining that Penfold “declined to adopt a rule 1 under which ‘claimants such as Sierra Club could challenge regulations when 2 administered by the federal agency, rather than when adopted”). 3 A plaintiff cannot extend the limitations period by arguing that its procedural or 4 policy challenge accrued when the agency applied the rule to the plaintiff. Id. at 1366 5 (“Shiny Rock cannot recommence the statutory period by filing [a mining] application in 6 conflict with the [BLM’s land] withdrawal more than six years after publication in the 7 Federal Register”); see also Cal. Sea Urchin Comm’n v. Bean, 828 F.3d 1046, 1050 (9th 8 Cir. 2016) (“Our cases on this topic determine the timeliness of APA challenges 9 according to when the applicable agency action was taken. We have held that a statute of 10 limitations may run against a plaintiff even if it is not injured until more than six years 11 after the relevant agency action became final.”) (citing Shiny Rock, 906 F.2d at 1363). 12 In Wind River Mining Corp. v. United States, 946 F.2d 710 (9th Cir. 1991), the 13 Ninth Circuit provided the following explanation for this rule: 14 If a person wishes to challenge a mere procedural violation in the adoption of a regulation or other agency action, the challenge must be brought within 15 six years of the decision. Similarly, if the person wishes to bring a policy- 16 based facial challenge to the government’s decision, that too must be brought within six years of the decision. This result, even if not dictated by 17 Penfold and Shiny Rock, would make the most sense. The grounds for such 18 challenges will usually be apparent to any interested citizen within a six- year period following promulgation of the decision. 19 946 F.2d at 715. 20 Second, a plaintiff may challenge the substance of an agency rule as exceeding 21 statutory or constitutional authority by bringing an APA claim within six years of the 22 agency’s application of the rule to the plaintiff. See id. at 715-16 (noting that “[s]uch 23 challenges, by their nature, will often require a more ‘interested’ person than generally 24 will be found in the public at large’); Cal. Sea Urchin, 828 F.3d at 1051 (explaining that 25 because the plaintiff in Wind River “alleged that the BLM’s 1979 rule . . . violated its 26 statutory authority, we recognized that subsequent final agency actions applying the 1979 27 rule would also allegedly exceed the agency’s statutory authority”) (citation omitted). 28 1 Thus, “[u]nder Wind River, challenges to a ‘mere procedural violation in the 2 adoption of a regulation or other agency action’ must be brought within six years of the 3 agency rulemaking, whereas challenges to ‘the substance of an agency’s decision as 4 exceeding constitutional or statutory authority’ may be brought any time ‘within six years 5 of the agency’s application of the disputed decision to the challenger.’” Perez-Guzman v. 6 Lynch, 835 F.3d 1066, 1077 (9th Cir. 2016) (citation omitted); see also Hyatt v. United 7 States Pat. & Trademark Off., 904 F.3d 1361, 1372 (Fed. Cir. 2018) (discussing the 8 different accrual rules for APA claims); Harrosh v. Tahoe Reg’l Plan. Agency, No. 2:21- 9 cv-01969-KJM-JDP, 2022 WL 16856187, at *9-10 (E.D. Cal. Nov. 10, 2022) (same). 10 The Court agrees with the United States that the APA claims asserted in counts 11 one and three are procedural challenges to Notice 2007-83. These counts are barred by 12 § 2401(a) because they were not brought within six years of the Notice’s issuance in 13 2007. See Doc. 23 at 27-28. 14 Count one alleges that the Court may set aside an agency rule issued without 15 “observance of procedure” required by law, that agency rules must be published in 16 accordance with “notice-and-comment procedures[,]” and that the IRS failed to comply 17 with those procedures in issuing Notice 2007-83. Doc. 1 ¶¶ 49-50, 56 (citing 5 U.S.C. 18 §§ 553, 706(2)(D)). This is a procedural challenge. See Hyatt, 904 F.3d at 1372 (“Hyatt 19 argues that the PTO promulgated [the rule] without providing public notice and an 20 opportunity to comment. Because this challenge alleges a procedural irregularity in the 21 PTO’s adoption of the rule, this right of action accrued at the time the agency made its 22 initial decision to adopt [the rule].”); Utu Gwaitu Paiute Tribe of Benton Paiute Rsrv. v. 23 Dep’t of Interior, 766 F. Supp. 842, 844 (E.D. Cal. 1991) (“A more common procedural 24 challenge concerns the failure of the administrative agency in question to comply with 25 the notice and comment provisions of the APA, 5 U.S.C. § 553, prior to final publication 26 of the regulation. Thus, in a procedural challenge, it is the manner in which the 27 regulation was adopted which is in issue; the content or substance of the regulation is 28 irrelevant.”); see also Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 220 (2016) 1 (noting that a legislative rule is “procedurally defective” when an agency “fails to 2 proceed through notice-and-comment rulemaking”). 3 Count three also asserts a procedural defect. It alleges that the IRS’s actions in 4 issuing the Notice were arbitrary and capricious because the IRS failed to permit public 5 comment and did not provide adequate reasons for issuing the Notice. Doc. 1 ¶¶ 82-86 6 (citing 5 U.S.C. § 706(2)(A)). As noted above, failure to provide public comment is a 7 procedural flaw. Similarly, an APA claim based on failure to explain the agency’s 8 reasons alleges “a procedural violation in the adoption of [the rule].” Perez-Guzman, 835 9 F.3d at 1077 (citing Wind River, 946 F.2d at 714); see Encino Motorcars, 579 U.S. at 221 10 (“One of the basic procedural requirements of administrative rulemaking is that an 11 agency must give adequate reasons for its decisions. . . . [W]here the agency has failed to 12 provide even that minimal level of analysis, its action is arbitrary and capricious[.]”) 13 (citing § 706(2)(A)). 14 Count two, in contrast, asserts a substantive challenge. Such a challenge “is based 15 on grounds that [the agency’s rule] exceeds statutory authorization, or that its authorizing 16 legislation is unconstitutional.” Utu Gwaitu Paiute Tribe, 766 F. Supp. at 844; see Wind 17 River, 946 F.2d at 715. Count two alleges that while § 6707A authorizes the IRS to 18 identify listed transactions, such transactions “must be specifically identified.” Doc. 1 19 ¶ 68. It claims that Notice 2007-83 does not describe the elements of the listed 20 transaction or their claimed tax benefits “with the requisite specificity.” Id. ¶¶ 69-70. 21 This is a challenge to the substance of the Notice – an argument that its language is too 22 vague to provide fair notice to taxpayers and to satisfy statutory requirements. Plaintiffs 23 ask the Court to set aside the Notice under 5 U.S.C. § 706(2)(C), which prohibits agency 24 action “in excess of statutory jurisdiction, authority, or limitations[.]” Id. ¶¶ 67, 77; see 25 also id. ¶ 14 (“Notice 2007-83 is ultra vires in nature, lacking underlying authority[.]”). 26 Because count two challenges the allegedly too-vague substance of Notice 2007-83 and 27 the IRS’s statutory authority to issue it, count two is a substantive challenge to the rule. 28 See Wind River, 946 F.2d at 714 (“Wind River asserts that the BLM’s designation of 1 [Wilderness Study Area] 243 was ultra vires as exceeding the agency’s statutory 2 authority. We think that different considerations guide the application of the statute of 3 limitations to such [substantive] challenges[.]”). As a result, count two is not barred by 4 the six-year limitations period. The claim was brought within six years of when the IRS 5 applied the Notice to Plaintiffs in 2019. See id. at 716 (“We hold that a substantive 6 challenge to an agency decision alleging lack of agency authority may be brought within 7 six years of the agency’s application of that decision to the specific challenger.”). 8 The United States contends that count two is a facial challenge to the Notice, not 9 an “as-applied” claim. Docs. 23 at 28-29, 30 at 15-16. But substantive challenges can be 10 “both ‘facial’ and ‘as applied’ attacks.” Utu Gwaitu Paiute Tribe, 766 F. Supp. at 844; 11 see also Cal. Sea Urchin, 828 F.3d at 1050 (“Though FWS characterizes Plaintiffs’ 12 complaint as a ‘facial’ challenge to FWS’s authority to cancel the translocation program, 13 that argument goes to the merits of Plaintiffs’ underlying action. It does not make 14 Plaintiffs’ 2013 challenge to FWS’s 2012 agency action untimely.”).7 15 2. Equitable Tolling. 16 Plaintiffs contend that the AIA prevented them from challenging Notice 2007-83 17 before CIC Services was decided in 2020 and they therefore are entitled to equitable 18 tolling of the limitations period. Doc. 27 at 27 at 14-17. The party “seeking equitable 19 tolling bears the burden of establishing two elements: (1) that he has been pursuing his 20 rights diligently, and (2) that some extraordinary circumstances stood in his way.” Pace 21 v. DiGuglielmo, 544 U.S. 408, 418 (2005). Plaintiffs have not met their burden with 22 respect to the first element. 23 As explained in Wind River, the grounds for procedural challenges to an agency 24 decision “will usually be apparent to any interested citizen within a six-year period 25 following promulgation of the decision[.]” 946 F.2d at 715. Actual knowledge of the 26 7 The government asserted during oral argument that count five is also barred by 27 the statute of limitations, but that argument was not made in the motion to dismiss. See Doc. 23 at 27-29 (arguing only that the APA claims in counts one through three are time 28 barred). 1 agency’s decision “is not required for a statutory period to commence” because 2 “[p]ublication in the Federal Register is legally sufficient notice to all interested or 3 affected persons regardless of actual knowledge or hardship resulting from ignorance.” 4 Shiny Rock, 906 F.2d at 1364 (citation omitted). 5 Plaintiffs did not need to have a trust involving cash value life insurance policies 6 “to discover procedural errors in the adoption of [Notice 2007-83].” Wind River, 946 7 F.3d at 715. And yet they did not bring their procedural challenges to Notice 2007-83 8 until September 2019 – nearly twelve years after the Notice was issued and six years after 9 the limitations period had expired. See Govig I, Doc. 1 ¶¶ 112-38 (APA claims asserting 10 that the IRS failed to provide notice-and-comment procedures and adequate reasons for 11 the Notice). Because Plaintiffs did not diligently pursue their procedural challenges to 12 Notice 2007-83, they are not entitled to equitable tolling with respect to counts one and 13 three. See Doc. 30 at 13; Wind River, 946 F.2d at 715 (“The government’s interest in 14 finality outweighs a late-comer’s desire to protest the agency’s action as a matter of 15 policy or procedure.”); see also Miranda v. Castro, 292 F.3d 1063, 1066 (9th Cir. 2002) 16 (explaining that equitable tolling is “unavailable in most cases” because the “threshold 17 necessary to trigger equitable tolling is very high”). 18 The government notes that a “statute of limitations may run against a plaintiff 19 even if it is not injured until more than six years after the relevant agency action became 20 final.” Doc. 23 at 30 (quoting Cal. Sea Urchin, 828 F.3d at 1050). Plaintiffs assert that 21 this quote merely explains the Ninth Circuit’s “outdated” decision in Shiny Rock. 22 Doc. 27 at 16. But while California Sea Urchin found that the plaintiffs’ claims were 23 more analogous to Wind River than Shiny Rock, nothing in the decision suggested that 24 Shiny Rock is no longer good law. See 828 F.3d at 1050-52.8 25 8 Plaintiffs further assert that the United States waived the statute of limitations 26 defense by not asserting it in Mann and because the IRS has somehow taken the position that Notice 2007-83 was not a “final” agency action. Doc. 27 at 19-21. Plaintiffs cite no 27 legal authority suggesting that a party waives an argument in one lawsuit because it failed to make the argument in a different lawsuit against different parties, and Plaintiffs 28 provide no clear explanation for how any alleged non-finality of the Notice constitutes a 1 IT IS ORDERED: 2 1. The United States’ motion to dismiss (Doc. 23) is granted with respect to 3 | counts one, three, and five, and denied with respect to counts two and four. 4 2. The United States’ motion for leave to respond or strike (Doc. 32) is 5| denied. 6 3. The Court will set a case management conference by separate order. 7 Dated this 22nd day of March, 2023. 8 > Ly 9 peed 6 Cater pltl 10 David G. Campbell ll Senior United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 30