17 November 2023ArticleUSA analysis

When the Executive Branch oversteps its authority

In the US we believe in the rule of law. In my opinion, that is largely what sets our country apart from many other countries globally—the consistent adherence to the rule of law. My initial focus is on the power of Congress to “lay and collect taxes” as set forth in the Constitution (article 1, section 8, clause 1). As noted in the Constitution, it is Congress’s duty to set forth tax law and the duty of the executive branch (the President and the agencies under his or her purview) to administer the laws as decreed by Congress.

If Congress has the power to “lay and collect taxes,” it also has the power to limit what is taxed for an appropriate governmental and societal end. In 1986, Congress passed the Tax Reform Act of 1986, a massive overhaul of the existing tax code. There was a Republican President in office (Ronald Reagan), but the bill received bipartisan support, including Tip O’Neill’s vote (then Democratic Speaker of the House). This is of note because in that act both political parties recognised the need to provide myriad important tools to aid American businesses to gain and retain a global edge in the world economy.

In the many pages of that act is a section of law that provides a risk mitigation tool to small business owners that has become a powerful tool in helping small businesses stay in business and mitigate numerous intangible risks that insurance companies rarely contemplate and are reticent to insure. This is section 831(b) of the Internal Revenue Code, also known as the microcaptive insurance option.

Central to this described separation of powers is that the administration effectively and accurately implements the will of Congress. An essential individual in the implementation of the tax code is the Commissioner of the Internal Revenue Service (IRS), appointed by the President, with the consent of the US Senate. The Commissioner is responsible for the administration and enforcement of the Internal Revenue Code. The Treasury Regulations (26 CFR §301.7805.1) specify that the Commissioner “shall prescribe all needful rules and regulations for the enforcement of the code”.

Unfortunately for the citizens of the US, this enforcement by the IRS has increasingly become selective enforcement by the agency and thus the President. As many will recall, when Barack Obama was in office, the IRS was weaponised against the perceived enemies of the administration.

The subsequent President (Trump) and current President Biden have done little to mitigate the partisan sentiment and distrust of the IRS. While this partisanship and politicisation may be entirely appropriate for a political action committee, it is wholly inappropriate for any agency of the US to selectively enforce the laws of the nation.

One of my favourite images is that of the blindfolded Lady Justice. While I am not naïve to the fact that we all bring biases to every interaction we make in life, in the administration of tax law, the government should never be picking winners and losers, but should strive only to regulate and apply the law as duly passed by the elected officials of the American people. Ideally, all those who belong to the system of governance in the US strive to adhere to that principle of objectivity in honouring, administering, and upholding the law.

The IRS’s core duty

This brings me to my point: as far as microcaptives are concerned, the IRS has neglected its well-codified duty to provide guidance and to bright-line rules as to how citizens of this great nation should best utilise the tools that Congress has provided and authorised to build their businesses, their communities, and this country.

It is the most serious usurpation of its duty to abdicate this responsibility to whim and instead use the opacity of its stance to intimidate and scare business owners from utilising this section of the code that could readily enable their businesses to flourish and continue to hire appropriate individuals and mitigate risk through any other available means.

Due to ravaged budgets (this has been reversed; we will see if the results match the exceptional expenditure over the next decade), weaponised agents for political purposes, and an exodus of talented individuals, the IRS is in a fragile state. The agency needs to revert to its core duty, which is to provide taxpayers with a fair and understandable framework in which to run their lives and businesses.

It is not in the purview of the IRS to opine or administratively legislate personal views into the code. If individuals inside the agency wish to express displeasure with laws passed by Congress, they may, like all other citizens, vote at the polls to replace elected officials who do not represent their viewpoints.

To be clear, I am advocating for the IRS to provide clear guidance on what a properly structured microcaptive looks like. Businesses utilising microcaptives and those groups properly helping businesses to form microcaptives want appropriate regulation. These groups are fine and in fact want bad players to be removed from the market. This is a good thing. To do this correctly, it will necessarily require industry input, as the insurance industry is the convergence of legal, finance, and risk management.

The IRS has merely focused on tax implications from microcaptives. This has been all the discussion, regarding the collection (or lack) of revenue. The issue is much broader, deeper, and more complex than merely an addition and/or subtraction of tax revenue collected by the agency. As stated previously, Congress provided a tool and has instructed the agency to express to small businesses the correct manner to build microcaptives.

It is not up for debate what Congress intended, or the tax consequences of those intentions. What is still up for debate is whether the agency will properly provide clear, neutral guidance on microcaptive structures.

Peter Dawson is a partner at the law firm Backus, Dawson & Smith, PC, and an advisor for the 831(b) Institute. He can be contacted at: pdawson@bds-legal.com