US Supreme Court decision sets up showdown over legality of Notice 2016-66
The US Supreme Court has ruled in favour of CIC Services in its ongoing dispute with the Internal Revenue Service regarding micro captives and the legality of Notice 2016-66, setting the stage for a showdown that could potentially see the IRS Notice enjoined.
The Supreme Court was specifically ruling on the question of whether the Anti-Injunction Act bars any “suit for the purpose of restraining the assessment or collection of any tax,” and whether that Act prohibits a suit seeking to set aside an information reporting requirement that is backed by both civil tax penalties and criminal penalties.
“We hold that the Act does not preclude the suit,” the court said.
CIC Services had filed a complaint challenging the legality of Notice 2016-66 under the Administrative Procedure Act, which states that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”
CIC called for the District Court to grant injunctive relief setting the notice aside, with that court dismissing the action on the basis that it would be barred by the Anti-Injunction Act, which requires those contesting a tax’s validity to pay the tax before filing a legal challenge. A divided panel of the Sixth Circuit affirmed, leaving the decision to the Supreme Court.
The Supreme Court’s most recent ruling clears the way for the trial court to rule on whether Notice 2016-66 is in fact illegal, and whether it should therefore be enjoined.
The Supreme Court’s decision cited the fact that Notice 2016-66 imposes affirmative reporting obligations, inflicting costs separate and apart from the statutory tax penalty. “Because the IRS chose to address its concern about micro-captive agreements by imposing a reporting requirement rather than a tax, suits to enjoin that requirement fall outside the Anti-Injunction Act’s domain,” it said.
The court stressed that Notice 2016-66 levies no tax, but rather compels taxpayers and their advisors to collect and submit detailed information about micro-captive transactions. The gathering of such information is likely to be costly, and potentially significantly in excess of the tax penalties for a violation, it noted.
The court concluded CIC’s suit could not be classified as an effort to enjoin a tax because “CIC stands nowhere near the cusp of tax liability.”
It added: “To owe any tax, CIC would have to first violate the Notice, the IRS would then have to find noncompliance, and the IRS would then have to exercise its discretion to levy a tax penalty.”
The ruling stated that the presence of criminal penalties had forced CIC to bring an action to the courts. “The government’s proposed alternative procedure - having a party like CIC disobey the Notice and pay the resulting tax penalty before bringing a suit for a refund - would risk criminal punishment,” it said.
