On The Case

Business groups urge Supreme Court to allow pre-enforcement review of IRS regulations

(Reuters) - The U.S. Chamber of Commerce and other business group told the U.S. Supreme Court in amicus briefs filed Wednesday in CIC Services v. Internal Revenue Service that the justices should not allow the IRS and the Treasury Department to use the Anti-Injunction Act to evade pre-enforcement challenges to IRS policies. The groups called upon the Supreme Court to overturn a 2019 ruling (925 F.3d 247) that the AIA bars CIC from bringing an Administrative Procedure Act suit over a 2016 IRS policy that boosts reporting requirements for captive insurance transactions.

“On the view of the court below, many dubious IRS regulations will go without review altogether, as businesses often cannot afford chancing the financial and reputational consequences of non-compliance,” wrote the Chamber’s lawyers at Jones Day.

“Prolonged uncertainty in the tax law festers and causes more pain for everyone,” wrote Baker McKenzie in a separate brief for the National Federation of Independent Business, the Global Business Alliance and five other groups. “Flatly prohibiting pre-enforcement judicial review exacerbates the problem.”

The Justice Department, which opposed Supreme Court review of the 6th Circuit decision, did not immediately respond to a request for comment on the business groups’ amicus filings. CIC Supreme Court counsel Patrick Strawbridge of Consovoy McCarthy also did not immediately respond to an email.

CIC described itself in its Supreme Court opening brief as an adviser to taxpayers engaged in captive insurance transactions, in which an insured entity creates its own insurance company to replace or augment insurance from third-party commercial insurers. CIC told the Supreme Court that captive insurance allows companies to “tailor deductible and premium amounts, coverage scope and risk tolerance.” But in 2016, concerned about abuse of the device as a tax shelter, the IRS boosted reporting requirements on captive insurance transactions. The penalty for defying those requirements was potentially huge: as much as $200,000 for advisers that did not provide the IRS with a list of reportable transactions they were involved in, plus as much as $10,000 per day for failing to maintain a list of those deals. CIC said the IRS penalty even included the prospect of prison time.

Before the IRS deadline, CIC sued in federal court in Tennessee, arguing that the policy was adopted without the notice and comment process required by the Administrative Procedure Act. The government countered that CIC’s suit was barred by the Anti-Injunction Act – an 1867 law designed to preclude taxpayers from skirting their tax obligations by suing the government. CIC said that the AIA did not apply because it was seeking relief from reporting requirements, not from paying taxes. But a divided 6th Circuit panel, citing the D.C. Circuit’s 2015 decision in Florida Bankers Association v. U.S. Treasury (799 F.3d 1065) held that the penalty for failure to comply with the IRS reporting requirements was a “tax,” so the AIA precluded CIC’s suit. (The 6th Circuit denied a request to rehear the case en banc, over an angry dissent from Judge Amul Thapar.)

CIC argued in its opening brief that the 6th Circuit decision frustrates the very purpose of the APA – and that if the AIA bars a pre-enforcement challenge to a policy that carries a penalty of imprisonment, it may be an unconstitutional violation of due process.

The business groups picked up that theme in their amicus briefs, arguing that the 6th Circuit analysis would effectively insulate IRS regulations from APA scrutiny, by way of a law passed before the rise of the administrative state. For companies subject to IRS policies, the Chamber said, the 6th Circuit has imposed an impossible dilemma: “They must either violate regulatory directives and thereby expose themselves to potentially ruinous financial and reputational harms, or else embrace legal uncertainty and absorb the costs of complying with potentially ultra vires regulations,” the Chamber said. “Neither course is conducive to a stable business climate or economic growth.”

The NFIB brief, whose signatories include international businesses, argued that the entire U.S. economy will suffer if taxpayers are effectively barred from challenging IRS policies before those policies are enforced. “This blanket immunity is bad for everyone,” the brief said. “The uncertainty engendered by barring pre-enforcement challenges complicates compliance with the tax law and creates a drag on the economy.”

I’m sure CIC Services v. IRS will not be the most celebrated or controversial of the Supreme Court’s cases next term, when, among other things, the justices will consider an effort, backed by the Trump administration, to overturn the Affordable Care Act. But when the business lobby believes a case has important consequences, it’s always worth paying attention.