Supreme Court Case Offers Good Defense Against Trump IRS Audits

The Trump administration has demonstrated an eagerness to target individuals and entities, including tax-exempt organizations, for activities that appear to be protected by the First Amendment. This includes speech perceived as antisemitic on college campuses; initiatives, research, and courses touching on matters the administration claims to be discriminatory or advancing diversity, equity, and inclusion policies; political associations; or other ideological positions at odds with the administration’s preferences.

My colleagues recently wrote about Trump’s instructing the IRS to increase audits and referrals for criminal prosecution of “left-leaning” nonprofit organizations. In addition to criminal investigations, nonprofits and individuals may be subjected to a civil enforcement investigation because of their First Amendment protected conduct.

An enforcement action (including the revocation of tax-exempt status for nonprofits) may be the ultimate fear for those subjected to a civil investigation, but it’s not the only harm. An investigation subjects the target to an invasive process. Depending on the agency, it may include document and testimony subpoenas, site visits, interviews of employees, vendors, and others—all of which is disruptive and may chill exercise of the First Amendment rights that prompted the targeting.

Ordinarily, advice from defense counsel during an investigation distills to a “hunker-down” strategy and, at best, well-counseled individuals and entities may convince the government sooner rather than later that no violations exist. Meanwhile, the target of a civil investigation must simply endure it.

But this administration’s very public efforts to target constitutionally protected conduct—and a 2023 US Supreme Court decision—offer crucial tools to targeted individuals, entities, and nonprofits to take a different approach, which is to go on the offensive to seek an injunction enjoining the investigation.

In Axon Enterprises Inc. v. FTC, the Supreme Court allowed litigants against the Federal Trade Commission and the Securities and Exchange Commission to bring federal cases claiming constitutional violations against the two agencies prior to a final agency adjudication.

Typically, challenges to administrative proceedings (including by the FTC and SEC) are subject to “statutory review” provisions, meaning challenges must come after such proceedings are completed.

But the subjects of separate FTC and SEC administrative enforcement actions, Axon Enterprises and Michelle Cochran, challenged the constitutionality of those agencies’ enforcement structure at the onset of the agency proceedings. Both sought relief, including injunctions, from being subjected to the purportedly unconstitutional agency proceedings at all.

In deciding Axon, the justices analyzed three factors set forth in Thunder Basin Coal Co. v. Reich. Courts analyze these so-called Thunder Basin factors to determine whether Congress intended to preclude courts from hearing the type of challenge prior to completion of the administrative process.

The importance of Axon is its analysis of the first Thunder Basin factor, which is whether precluding district court jurisdiction forecloses “all meaningful judicial review of the claims.” While both the FTC and SEC statutory-review scheme allowed Axon and Cochran to raise constitutional challenges within the administrative proceedings and seek judicial review of them afterward, the injury Axon and Cochran alleged was the “here-and-now injury” of being subjected to unconstitutional authority by the agencies.

The Supreme Court found that injury was impossible to remedy once the proceeding was over because, if Axon and Cochran prevailed on their constitutional claims, they would already have been subjected to the proceeding “irrespective of its outcome.”

The second Thunder Basin factor, which is whether the question being brought to federal court is “collateral” to the issue being adjudicated by the agency, also should weigh in favor of federal court jurisdiction. For a person or entity targeted for investigation because of their First Amendment activity, the constitutional violation arises regardless of, or even in spite of, a potential underlying civil violation.

Finally, the third Thunder Basin factor, whether the claim was outside of the agency’s expertise, will typically favor federal court review of constitutional claims because agencies usually have no special expertise in determining those questions.

Addressing the IRS because it has been a recent focus, specifically regarding tax-exempt organizations, the Anti-Injunction Act imposes a stringent statutory-review scheme that typically closes the federal courts to actions seeking to forestall the assessment or collection of taxes.

But a challenge to an examination isn’t one seeking to “restrain” the assessment or collection of taxes. It’s merely seeking, like Axon, to stop the unlawful exercise of executive branch power. Such a challenge fits comfortably within Axon’s reasoning.

Whether Axon can be used to forestall an improperly targeted civil investigation will depend on the circumstances surrounding the initiation of that investigation. But the current administration’s brazenness and open targeting of its perceived political opponents may provide a targeted person or entity with enough facts to mount an early court challenge.

Entities and individuals who believe they may be targeted by the administration should consult with sophisticated counsel as early as possible, begin building a record of such targeting, and potentially prepare complaints in advance of receiving notice of an actual investigation.

The case is Axon Enterprises Inc. v. FTC, U.S., Nos. 21-86 and 21-1239, decided 4/14/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Victor Suthammanont is a partner at Kostelanetz and was an enforcement attorney at the US Securities and Exchange Commission, serving as a senior trial counsel and enforcement counsel.

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