Supreme Court Justices Question IRS Shield in Tax-Shelter Case -- 2nd Update
December 01 2020 - 6:13PM
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 disclosure requirement drew a challenge from CIC Services
LLC, which 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
is instead 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 offered support for 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 violate the law willfully
to challenge it, subjecting itself to penalties or even
prosecution. CIC has been following the requirements and hasn't
been penalized.
"This is, 'violate the tax code now, risk jail time and your
professional license, and if the IRS agreed to give you a penalty,
then litigate later,'" he said as part of his argument.
Justice Alito voiced agreement. "I really don't see how they can
get review without committing a crime," he said.
The government argued that Congress expressly determined that
the penalty for violating the disclosure requirement would be a tax
and that lawsuits before enforcement aren't allowed. In the
government's view, the Anti-Injunction Act applies and CIC
shouldn't be able to sue unless it faces a penalty for
noncompliance.
"It would seem to me that if a lawsuit stops the IRS from
collecting taxes from you, that that's exactly what the
Anti-Injunction Act was intended to prohibit," said Justice Sonia
Sotomayor.
Mr. Bond said CIC wouldn't face criminal prosecution if it filed
tax returns that omitted the required information and stated
clearly that it was seeking to challenge the regulations as
invalid.
"The court can avoid any doubt on that score by saying as much
in its opinion," he said.
A decision is expected by June.
Write to Richard Rubin at richard.rubin@wsj.com and Brent
Kendall at brent.kendall@wsj.com
(END) Dow Jones Newswires
December 01, 2020 17:58 ET (22:58 GMT)
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