CIC Services is feeling confident after giving evidence before the US Supreme Court on December 1 in a lawsuit that asks the federal courts to proclaim Internal Revenue Service (IRS) Notice 2016-66 illegal and to forbid its enforcement.
CIC argues that the IRS Notice 2016-66 is illegal on the basis that it was promulgated in contravention of the Administrative Procedures Act. This is the Federal law that protects the public from arbitrary, capricious or otherwise illegal Executive Branch rule-making, by requiring administrative agencies like the IRS to comply with certain procedural requirements before any promulgated rule will be deemed valid.
“The IRS admittedly did not comply with these procedures nor has it argued that it was not required to,” said Sean King, principal at CIC Services. “The rule is thus clearly illegal and unenforceable.”
The issue has reached the Supreme Court after the trial court declared itself unable to intervene in the matter. “Though sympathetic to our situation, the trial court said in our case that it was powerless to intervene on our behalf because the Anti-Injunction Act forbids federal courts from ‘restraining’ the ‘assessment or collection of a tax’, explained King. “We believe the trial court’s determination that it was powerless to intervene to be an error. This is the issue now before the Supreme Court.”
CIC argues the IRS has used threats and other means to compel taxpayers - in this case captive owners - to abide by its illegal notice. “With full awareness of its illegality, the IRS has refused to withdraw the notice or to announce that taxpayers need not abide by it,” said King. “In fact, it has done the opposite: it has repeatedly emphasised to taxpayers that, should they refuse to comply, they may be subjected to draconian penalties, the assessment of which are exclusively within the IRS’s unreviewable discretion.” There has even been a threat of criminal prosecution for willful failure to comply.
“Such rogue behavior by the IRS is not just inappropriate, it’s tyrannical,” said King.
He added: “We believe that both the legally right and morally right decisions are to forbid the IRS from knowingly enforcing illegal rules where any resulting tax revenue is at best far downstream from the requirements imposed by the illegal rule. We believe that the Court will come to the same conclusion.”
If CIC wins the case will be remanded to the trial court for determination as to whether the notice is in fact illegal, and whether it should therefore be enjoined, with the Supreme Court having established that the Anti-Injunction Act is not a barrier to such an order. “Should we get to that point, we are confident that an injunction would be issued,” King added.
If that happens, the IRS will not be permitted to enforce Notice 2016-66. “At that point [the IRS] will either drop the requirements contained therein or seek to reissue those requirements in a legal manner following the process required by Congress,” said King. In that case there would be an open and transparent process in which the public and the industry will be permitted to share their views, he added.
CIC Services, Sean King, IRS, US Supreme Court