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Justices to Review Scope of Law Halting Lawsuits on Tax Rules (1)

May 4, 2020, 1:32 PM; Updated: May 4, 2020, 3:17 PM

The Supreme Court will hear a case dealing with how far a Civil War-era statute goes in blocking lawsuits that challenge tax regulatory actions.

CIC Services LLC asked the justices to reverse the Sixth Circuit’s decision to dismiss the Tennessee firm’s lawsuit under the Anti-Injunction Act, which generally prohibits lawsuits trying to restrain tax assessment or collection. A reversal would mean that taxpayers may challenge more tax regulatory actions—currently Treasury and the IRS generally don’t face lawsuits challenging regulatory actions that haven’t yet been enforced, unlike other federal agencies.

The firm challenged a reporting requirement backed by a penalty, which the U.S. Court of Appeals for the Sixth Circuit deemed a “tax” under the Anti-Injunction Act. A key question is whether the 1867 act, which Congress has amended to create some exceptions, should be interpreted to apply outside those exceptions across the breadth of modern-day tax regulation.

“We think that this presented important and serious issues with respect to administrative law and what we feel is overreach by the Internal Revenue Service in these types of matters,” said Adam R. Webber of Elliott, Faulkner & Webber, who represented CIC Services.

The Justice Department declined to comment. The IRS and the Treasury Department didn’t immediately return requests for comment.

CIC Services has argued that it could face criminal prosecution if it violates the reporting requirement, which it would have to do under the Sixth Circuit decision in order to bring the case. The IRS has argued that failing to report the information would encourage tax evasion, which the Anti-Injunction Act was designed to prevent.

Divisive Issue

In the substance of its lawsuit, CIC Services has said that the IRS didn’t follow proper procedures when issuing Notice 2016-66, which creates a penalty-backed requirement for firms to report the micro-captive transactions they advised on. These arrangements, which the IRS fears are being used as tax-avoidance vehicles, involve small insurance companies that are permitted to pay taxes on just their investment income if their income from premiums isn’t more than $2.3 million.

The case strongly divided the 16 judges of the Sixth Circuit, with seven signing onto a dissent against the full court’s decision not to rehear the 2-1 ruling by three of their colleagues in favor of the government.

The case is CIC Services, LLC v. Internal Revenue Service, U.S., No. 19-930, cert granted 5/4/20.

(Updates with attorney comment starting in fourth paragraph. )

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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