The U.S. Court of Appeals for the Sixth Circuit won’t review the dismissal of a lawsuit against IRS efforts to combat micro-captive transactions, in a case raising major questions about when tax rules can be challenged in court.
The case, which could reach the Supreme Court, concerned a Knoxville, Tenn., firm’s argument that the Internal Revenue Service violated the Administrative Procedure Act by requiring taxpayers to pay a tax before suing to seek a refund on micro-captive transactions. These are transactions where a taxpayer or someone related to them treats a company as a captive insurance company—which typically offers risk-reducing services—in an attempt to reduce taxable income.
CIC Services LLC was an adviser to taxpayers in these transactions when the IRS issued Notice 2016-66 declaring that the transactions should be reported for tax purposes.
The firm’s suit challenging IRS enforcement was thrown out by the U.S. District Court for the Eastern District of Tennessee. The IRS maintained the Anti-Injunction Act barred the suit because the case didn’t involve a taxpayer challenging a tax liability that had already been enforced.
A core dispute was whether the suit was trying to stop the requirement to report the transactions or trying to stop the associated penalties for not reporting. The Anti-Injunction Act blocks suits “for the purpose of restraining the assessment or collection” of taxes. CIC Services focused on burdens from the reporting requirement, leading dissenting judges to argue it wasn’t challenging a tax.
A panel of Sixth Circuit judges affirmed the district court ruling on May 22 and CIC Services asked on July 8 for the full court to rehear that decision.
“Plaintiff’s suit seeks to invalidate the Notice, which is the entire basis for that tax,” Judge Eric L. Clay wrote in the May 22 majority opinion. Thus, he argued, CIC Services’s suit was focused on the tax’s assessment or collection and was governed by the act.
In a dissent to the Aug. 28 order, Judge Amul R. Thapar said the ruling would give the IRS far too much power.
“Going forward in this circuit, the IRS will have the power to impose sweeping ‘guidance’ across areas of public and private life, backed by civil and criminal sanctions, and left unchecked by administrative or judicial process,” he said in the dissent, which was joined by six other judges.
Clay, supporting the full court’s decision, wrote that the dissents of his colleagues were “their latest attempt to inflict death by distorted originalism on the modern administrative state.” He suggested that the dissenters were interpreting the act based on policy concerns instead of the traditional interpretive tools of courts.
Judge Jeffrey Sutton, who also supported the decision, was circumspect, pointing out that the nation’s highest court still has a chance to weigh in. “All of this leaves the Supreme Court in a well-informed position to resolve the point by action or inaction—either by granting review and reversing or by leaving the circuit court decisions in place,” he wrote.
Elliott, Faulkner & Webber and Consovoy McCarthy PLLC represented CIC Services.
The case is CIC Servs. LLC v. IRS, 6th Cir., No. 18-5019, 8/28/19.