Several Supreme Court justices scrutinized the IRS’s position on when a reporting requirement can be challenged, signaling the high court may allow the lawsuit to go forward.
Tennessee firm CIC Services LLC has argued that an IRS reporting requirement wasn’t issued properly in a lawsuit that has twice been stopped in lower courts. The firm is challenging Notice 2016-66, which requires parties advising on certain micro-captive transactions to report them to the government or face penalties.
Lower courts agreed with the IRS that a law known as the Anti-Injunction Act is standing in the firm’s way. That law generally forces a taxpayer to wait to challenge a tax rule until actually receiving a tax bill from the IRS or paying taxes under the rule.
In the Tuesday arguments, the IRS faced tough questions from both the liberal and conservative wings of the high court. A victory for CIC Services could lead to more taxpayer challenges to third-party reporting requirements, a move that some believe would be a major blow to the IRS’s ability to enforce tax laws.
Justice Stephen Breyer commented to Jonathan C. Bond, who argued on behalf of the IRS, that normally there is judicial review of a government action requiring a person to do something when that government action is unlawful. But under the IRS’s theory, there may be no way to get judicial review without violating the requirement and paying a penalty, Breyer observed.
Justice Brett Kavanaugh suggested the Supreme Court could carve out an exception to Anti-Injunction Act limits against lawsuits when the penalties from violating a requirement in order to challenge it are high enough to be coercive and effectively deter a potential challenger from bringing a challenge in the first place.
Justice Amy Coney Barrett also signaled some skepticism of the IRS’s position during an exchange with Cameron T. Norris, who argued on behalf of CIC Services. Barrett suggested that the court could rule that the Anti-Injunction Act applies to this situation but, because potential criminal penalties leave CIC Services without an adequate, alternative remedy, the act doesn’t bar the lawsuit.
Not all questions suggested a loss for the IRS could be coming. Justice Sonia Sotomayor said she didn’t see how CIC Services could get around past Supreme Court decisions holding that a taxpayer can’t plead around the Anti-Injunction Act simply by alleging the tax is unlawful.
“The consequence of enforcing the notice is that you don’t have to report and the government can’t collect taxes,” Sotomayor said. “If you’re talking about looking at practical consequences, your failure to provide the notice results in a tax.
But Sotomayor later also questioned Bond about an element that could distinguish CIC Services’s case from earlier decisions related to the Anti-Injunction Act that went in favor of the government. Here, she noted, a third party must expend resources to gather and give information that the IRS wants in order to go after taxes from someone else.
The court has never said someone has to spend money “to not pay a tax they don’t owe,” she said.
The Notice
Micro-captive transactions involve small insurance companies that are able to enjoy a lower tax rate if their income from premiums isn’t above $2.3 million. According to the IRS, some of these transactions are improper tax-avoidance vehicles.
A three-judge panel of the U.S. Court of Appeals for the Sixth Circuit sided with the IRS in a 2-1 ruling in May 2019, dismissing the suit as barred by the Anti-Injunction Act. The ruling upheld a 2017 ruling from the U.S. District Court for the Eastern District of Tennessee.
The full Sixth Circuit in August 2019 declined to review the dismissal. The U.S. Supreme Court took the case in May of this year.
In its petition for Supreme Court review, CIC Services said the Anti-Injunction Act doesn’t bar its challenge to the reporting requirement, citing the Supreme Court’s 2015 decision in Direct Marketing Ass’n v. Brohl. The court held that a statute worded similarly to the Anti-Injunction Act but dealing with state taxation—the Tax Injunction Act—didn’t block a federal lawsuit over a penalty-backed reporting requirement.
The IRS responded that in the Direct Marketing case no one argued that the penalty at issue was itself a tax, unlike the penalty in the CIC Services case, which has been deemed a “tax” under tax code Section 6671(a).
The case is CIC Services, LLC v. Internal Revenue Service, U.S., No. 19-930, arguments heard 12/1/20. lance wallach wallachinc@gmail.com
Several Supreme Court justices scrutinized the IRS’s position on when a reporting requirement can be challenged, signaling the high court may allow the lawsuit to go forward.
Tennessee firm CIC Services LLC has argued that an IRS reporting requirement wasn’t issued properly in a lawsuit that has twice been stopped in lower courts. The firm is challenging Notice 2016-66, which requires parties advising on certain micro-captive transactions to report them to the government or face penalties.
Lower courts agreed with the IRS that a law known as the Anti-Injunction Act is standing in the firm’s way. That law generally forces a taxpayer to wait to challenge a tax rule until actually receiving a tax bill from the IRS or paying taxes under the rule.
In the Tuesday arguments, the IRS faced tough questions from both the liberal and conservative wings of the high court. A victory for CIC Services could lead to more taxpayer challenges to third-party reporting requirements, a move that some believe would be a major blow to the IRS’s ability to enforce tax laws.
Justice Stephen Breyer commented to Jonathan C. Bond, who argued on behalf of the IRS, that normally there is judicial review of a government action requiring a person to do something when that government action is unlawful. But under the IRS’s theory, there may be no way to get judicial review without violating the requirement and paying a penalty, Breyer observed.
Justice Brett Kavanaugh suggested the Supreme Court could carve out an exception to Anti-Injunction Act limits against lawsuits when the penalties from violating a requirement in order to challenge it are high enough to be coercive and effectively deter a potential challenger from bringing a challenge in the first place.
Justice Amy Coney Barrett also signaled some skepticism of the IRS’s position during an exchange with Cameron T. Norris, who argued on behalf of CIC Services. Barrett suggested that the court could rule that the Anti-Injunction Act applies to this situation but, because potential criminal penalties leave CIC Services without an adequate, alternative remedy, the act doesn’t bar the lawsuit.
Not all questions suggested a loss for the IRS could be coming. Justice Sonia Sotomayor said she didn’t see how CIC Services could get around past Supreme Court decisions holding that a taxpayer can’t plead around the Anti-Injunction Act simply by alleging the tax is unlawful.
“The consequence of enforcing the notice is that you don’t have to report and the government can’t collect taxes,” Sotomayor said. “If you’re talking about looking at practical consequences, your failure to provide the notice results in a tax.
But Sotomayor later also questioned Bond about an element that could distinguish CIC Services’s case from earlier decisions related to the Anti-Injunction Act that went in favor of the government. Here, she noted, a third party must expend resources to gather and give information that the IRS wants in order to go after taxes from someone else.
The court has never said someone has to spend money “to not pay a tax they don’t owe,” she said.
The Notice
Micro-captive transactions involve small insurance companies that are able to enjoy a lower tax rate if their income from premiums isn’t above $2.3 million. According to the IRS, some of these transactions are improper tax-avoidance vehicles.
A three-judge panel of the U.S. Court of Appeals for the Sixth Circuit sided with the IRS in a 2-1 ruling in May 2019, dismissing the suit as barred by the Anti-Injunction Act. The ruling upheld a 2017 ruling from the U.S. District Court for the Eastern District of Tennessee.
The full Sixth Circuit in August 2019 declined to review the dismissal. The U.S. Supreme Court took the case in May of this year.
In its petition for Supreme Court review, CIC Services said the Anti-Injunction Act doesn’t bar its challenge to the reporting requirement, citing the Supreme Court’s 2015 decision in Direct Marketing Ass’n v. Brohl. The court held that a statute worded similarly to the Anti-Injunction Act but dealing with state taxation—the Tax Injunction Act—didn’t block a federal lawsuit over a penalty-backed reporting requirement.
The IRS responded that in the Direct Marketing case no one argued that the penalty at issue was itself a tax, unlike the penalty in the CIC Services case, which has been deemed a “tax” under tax code Section 6671(a).
The case is CIC Services, LLC v. Internal Revenue Service, U.S., No. 19-930, arguments heard 12/1/20. lance wallach wallachinc@gmail.com