Supreme Court Justices Question IRS Shield in Tax-Shelter Case
December 01 2020 - 5:14PM
Dow Jones News
By Richard Rubin and Brent Kendall
WASHINGTON -- Supreme Court justices sharply questioned
arguments by the federal government that certain tax regulations
can't be challenged in court before they are enforced.
Justices across the ideological spectrum, including Samuel
Alito, Stephen Breyer, Elena Kagan and Neil Gorsuch, expressed
skepticism about the government's position during an hour-long oral
argument Tuesday. A ruling against the government would make it
harder for the Internal Revenue Service to demand and collect
information that it uses to police tax shelters and could invite
more-frequent legal challenges.
The case involves a requirement that taxpayers and their
advisers disclose certain questionable transactions when they file
their returns. They face tax penalties if they don't comply. That
disclosure effectively attaches a red flag to those tax returns,
letting the IRS more easily identify which ones to audit.
The taxpayer in question, CIC Services LLC, helps companies
create what are known as captive insurers, subsidiaries that can
get favorable tax treatment. For several years, the IRS has been
questioning many captive-insurance arrangements, warning that they
can be abusive tax shelters if they move money to a tax-favored
entity without insuring genuine risks. In 2016, the agency issued a
notice requiring disclosure of certain captive-insurance
transactions.
The court isn't considering the merits of captive insurance but
instead is examining the ways taxpayers can fight the IRS in
court.
Generally, taxpayers trying to challenge the IRS have two paths.
They can wait for an IRS assessment, refuse to pay and then go to
the U.S. Tax Court. Or they can pay taxes and then sue in federal
district court for a refund.
But they have less leeway to challenge regulations before the
IRS enforces them because of the Anti-Injunction Act, a
longstanding statute that bars lawsuits that attempt to prevent the
assessment or collection of taxes. The idea is that taxpayers
shouldn't be able to frustrate the important work of tax collection
by filing lawsuits.
The act and Supreme Court precedent "make clear that a suit
cannot proceed if the relief it seeks would legally bar the IRS
from collecting a tax," Justice Department lawyer Jonathan Bond
said.
CIC argued that the Anti-Injunction Act shouldn't apply in this
regard because there is no assessment or collection that is part of
the disclosure requirement.
Justice Kagan suggested that she agreed with CIC's position,
saying the point of the company's lawsuit wasn't to avoid the tax
penalty that stems from noncompliance but to challenge the
requirement itself.
"They're trying to invalidate a demand that they disclose
information," she said.
The company's lawyer, Cameron Norris, argued that the
government's stance would require CIC to willfully violate the law
in order to challenge it, subjecting itself to penalties or even
prosecution.
Write to Richard Rubin at richard.rubin@wsj.com and Brent
Kendall at brent.kendall@wsj.com
(END) Dow Jones Newswires
December 01, 2020 16:59 ET (21:59 GMT)
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