Sean King, the general counsel at CIC Services, has praised the US Supreme Court’s decision to allow a challenge to the Internal Revenue Service’s (IRS) Notice 2016-66, arguing the Anti-Injunction Act would be “tyrannically unconstitutional” if it gave the IRS carte blanche to enforce illegal regulations.
The IRS had never vigorously disputed CIC’s contention that Notice 2016-66 is an illegal regulation, King said. “In the latter stages of litigation especially, the Service more or less accepted, at least for the sake of argument, that the notice was illegally issued in contravention of the Administrative Procedures Act,” he explained.
Despite that, the IRS had committed to enforcing the notice, arguing the courts were powerless to stop it from doing so due to the Anti-Injunction Act, which prohibits federal courts from issuing injunctions that restrain the assessment or collection of tax.
“Almost unbelievably, the IRS’s position was essentially that it alone among federal agencies may, by virtue of the Anti-Injunction Act, issue and enforce even facially illegal regulations without court interference,” as long as the measures related to assessing or collecting tax, said King. “Neither the text nor the history of the Anti-Injunction Act supports such a contention, and the act would be tyrannically unconstitutional if it did.”
King said the ruling is “hugely significant, given that the IRS has made issuing illegal regulations and enforcing them against taxpayers part of its standard operating procedure.”
He warned: “An alarming percentage of substantive obligations that the IRS imposes upon taxpayers each year by fiat don’t comply with the procedural requirements of the Administrative Procedures Act, and so are illegal, and yet are still shamelessly enforced by the Service.”
On May 17, 2021 the Supreme Court of the United States ruled that the Anti-Injunction Act does not prevent federal courts from enjoining the IRS’s enforcement of illegal regulations in all circumstances, in a unanimous decision.
The ruling confirms the Anti-Injunction Act does not apply when the regulation imposes affirmative reporting obligations that inflict costs on taxpayers separate and apart from any tax or tax penalty. Neither does it apply when potential tax that may someday be assessed is many steps downstream from the present lawsuit, and when noncompliance with the illegal regulation is also backed by threat of criminal penalties.
The Supreme Court has now remanded the case back to the district court for a determination on whether or not Notice 2016-66 should be formally enjoined.
“When we go back to district court this time, the IRS will not be able to hide behind the Anti-Injunction Act”, said King. “This time it will have to defend itself as any other administrative agency would. It will have to account to the court for its abuses, and the court will be empowered to end it.”
David Slenn, a partner at the law firm Shumaker, Loop & Kendrick, admitted CIC Services had scored an important victory in winning the right to challenge Notice 2016-66. But he warned that even the Supreme Court had agreed with the IRS that no tax benefit should accrue if the premiums paid are not really for insurance but really reflects a sham to escape taxes.
“This decision has nothing to do with the problems micro-captive owners face in IRS exam as it pertains to the deductibility of premiums, exclusion of income, accuracy-related penalties, etc,” Slenn said.
Sean King, CIC Services, Anti-Injunction Act, Notice 2016-66, Internal Revenue Service, IRS, David Slenn, Shumaker, Loop & Kendrick