Evaluating the Landscape: Impact of CIC Services, LLC Case on Attorneys’ Fees and Government Fairness
The recent opinion from the United States District Court, Eastern District of Tennessee, continues the saga of the case of CIC Services, LLC (“CIC”) and has implications for taxpayers seeking to recover attorneys’ fees under the Equal Access to Justice Act (“EAJA”) and for its broader reflections on governmental fairness, particularly those looking to challenge certain transactions identified by the IRS to be reportable transactions (ex. Notice 2016-66 and Notice 2017-10).[1] This article provides a brief overview of the case, analyzes its potential repercussions, and examines the importance of this decision for similarly situated taxpayers and the government’s dealings with its constituents.
This case is a continuation of one we have previously written about.[2] This case has already been to the Supreme Court and back. Before, the discussion related to the validity of Notice 2016-66. In arguing against Notice 2016-66, CIC had to first overcome the Anti-Injunction Act, which the Supreme Court ultimately held to not preclude CIC’s action under the Administrative Procedure Act (“APA), challenging the validity of Notice 2016-66 for failure to provide an opportunity for notice-and-comment, as required under the APA.
Case Summary
The focus of the case at hand is significantly on the issuance of Notice 2016-66 by the IRS, which CIC contended was arbitrary and capricious under the APA. CIC proactively sought a motion for attorneys’ fees pursuant to the EAJA[3], positioning itself against the procedural lapse by the IRS, particularly if failing to provide notice-and-comment as required under the APA. The recommendation for denial of this motion was put forth by United States Magistrate Judge Jill E. McCook in her report and recommendation subsequently leading to CIC’s timely objection. However, the Court, distinguishing the substantial justification of the IRS’s position, overruled CIC’s objections, and accepted the recommendation, denying CIC’s motion for attorneys’ fees.
The APA notice-and-comment requirements are critical components of the APA framework, designed to ensure administrative actions are subjected to public scrutiny and deliberation before being institutionalized, serving as an essential check on arbitrary administrative actions. CIC argued that the IRS’s overall position in the case was not substantially justified, thereby warranting the recovery of attorneys’ fees under the EAJA. The Court, in scrutinizing the IRS’s position and actions, reviewed the nuanced relationship between procedural adherence and substantial justification, illuminating the significance of procedural integrity in administrative actions.
However, despite the Court’s acknowledgement of the arbitrary and capricious nature of the issuance of Notice 2016-66, the Court did not translate such into a conclusive denial of substantial justification on the part of the IRS. This poses crucial implications, showcasing the impact of procedural adherence, or the lack thereof, on the legitimacy and justification of administrative actions, thereby highlighting the indispensable role of notice-and-comment requirements under the APA.
CIC’s struggle underscores the significance of the repercussions of administrative lapses and the importance of upholding the procedural norms set forth by the APA. The case acts as a beacon, emphasizing the importance of abiding by the APA’s notice-and-comment requirements and serving as a potent reminder of the implications of overlooking these crucial procedural elements. It accentuates the continual necessity for administrative entities to maintain procedural sanctity and uphold the principles of transparency, deliberation, and responsiveness, intrinsic to the APA’s notice-and-comment requirements, to forestall the manifestation of arbitrary and capricious actions.
Legal Framework
The EAJA allows a prevailing party to recoup attorneys’ fees in a case against the United States unless the government’s position was substantially justified or special circumstances render an award unjust.[4] A position is substantially justified if it has a reasonable basis in law and fact, even if it is not correct.[5] The government is tasked with proving that its stance was substantially justified.[6] Thus, it would appear the Court’s opinion is that the government merely made a mistake as a whole. Even if the action was arbitrary and capricious, taken as a whole, the position was still (as the Court saw it) substantially justified.
Implications on Recovery of Attorneys’ Fees
This case addresses the complex interplay between the EAJA and actions deemed arbitrary and capricious under the APA, illustrating that even a ruling of arbitrary and capricious action does not automatically lead to an award of attorneys’ fees. Despite the IRS’s acknowledged arbitrary and capricious issuance of Notice 2016-66, the court found it was substantially justified, bringing to light the intricate nuances in evaluating substantial justification under EAJA.
For taxpayers, especially those in similar standings as CIC (looking at you, material advisors and taxpayers with respect to Notice 2017-10 – and other notices designating transactions as reportable), this implies that prevailing on the arbitrariness of a government action does not necessarily equate to an entitlement to attorneys’ fees. It sets a precedent that could potentially make it more difficult for similarly situated taxpayers to recover attorneys’ fees in cases of improper IRS Notices, even when they have legitimate grievances against governmental actions, emphasizing the need for comprehensive legal strategies to address both the merit of the case and entitlement to fees.
Broader Implications for Government Fairness
Beyond legal fees, this decision brings forth critical questions regarding the essence of fairness in the government’s dealings with its people. It highlights the tenuous balance between procedural correctness and substantial justification. Even when government actions, such as those by the IRS, are found to be procedurally flawed, they can still be deemed to be reasonably based, raising concerns about the adequacy of current safeguards against potentially unjust governmental actions. Should a government agency be entitled to a mulligan thus allowing them to, at least for a moment in time, regulate legislatively with an iron fist without having to reimburse taxpayers for having to prove them wrong?
For similarly situated taxpayers and entities, this suggests a need to be ever more vigilant and proactive in challenging governmental actions, especially when procedural integrity and substantial justification are at stake. It underscores the crucial role of judicial scrutiny in maintaining a balance between government actions and individual rights, fostering an environment conducive to fairness and justice.
Conclusion
This case serves as a crucial point of reflection on the interactions between government actions, procedural integrity, and substantial justification. While it poses challenges for taxpayers seeking to recover attorneys’ fees under EAJA, it also emphasizes the importance of maintaining procedural sanctity and a reasonable basis in governmental actions.
In essence, this case illustrates the intricate dance between law, fact, and fairness, reminding us of the importance of ensuring government’s accountability and the protection of individual rights in a balanced and equitable manner.
[1] CIC Services, LLC v. IRS, 132 AFTR 2d 2023-XXXX, (E.D. Tenn. 2023)
[2] https://esapllc.com/cic-injunction2021/
[3] 28 U.S.C. § 2412(d)(2)(B)(ii)
[4] 28 U.S.C. § 2412(d)(1)(A)
[5] United States v. Real Prop. Located at 2323 Charms Rd., 946 F.2d 437, 440 (6th Cir. 1991).
[6] DeLong v. Comm’r of Soc. Sec., 748 F.3d 723, 725-26 (6th Cir. 2014).
