(SOUTHERN PINES)…..The long awaited oral arguments in CIC Services v. IRS before the Supreme Court of the United States (SCOTUS) were held on Tuesday, December 1, 2020. Attorney and past NCCIA President W.Y. Alex Webb (Webb & Morton) and Association Co-founder R. Lane Brown III monitored the arguments for the Association. The NEWSLETTER is appreciative of the effort undertaken by Webb & Brown to provide this synopsis of the hearing that we have been promising.
Tuesday December 1st marked a milestone in an almost four-year effort by NCCIA to defeat the misguided IRS Notice 2016-16 (“Notice”). In case you have been in quarantine since early 2017, the Notice imposed onerous and expensive new disclosure filing burdens on the entire captive industry – including retroactive filings, on pain of severe financial penalties.
RELEVANT CASE HISTORY
Beginning in 2017 NCCIA brought the case to the attention of the membership leading some association members to instigate the Captive Insurance Defense Group (“CIDC”) that privately raised monies to file an injunction/declaratory judgement action against the IRS for violation of the Administrative Procedures Act (“APA”). Sean King of CIC Services, LLC was a participant in the CIDC effort. The CIDC needed a plaintiff for that lawsuit. King bravely stepped up as plaintiff (even though his attorney feared possible IRS retaliation). NCCIA was the ONLY captive trade group to file an Amicus Curiae (friend of the court) brief (“AB”) in the initial District Court action. The District Court Judge ruled against CIC as the IRS convinced him that he could not win an injunction or declaratory judgment action, since those remedies were forbidden by the Anti-Injunction Act (“AIA”). The AIA is a powerful weapon that the IRS has used to cancel attacks by taxpayers. The AIA forbids any action to enjoin assessment or collection of any tax. Obviously, the US Treasury needs to be protected so some version of the AIA has been in the law since the Civil War.
In the CIC Services case, the Petitioner (King) argues that the AIA is not relevant since all he seeks to enjoin are the onerous and expensive disclosures. CIC Services admits and acknowledges that penalties can, by law, be imposed if any person required to file Forms 8886 and 8918 does not file those forms. The penalties in this case – like many others in the Internal Revenue Code – are treated “as if” they are taxes. Of course, these penalties (as if taxes) are under the control of the IRS and are not automatically due with the 8886/8918 filings
THE FIRST APPEAL
CIC Services appealed the decision to the Sixth Circuit Court of Appeals. There were two rounds before this court. First (and normally last) was a 2-1 three judge ruling against the Petitioner. The sole dissent was very logical and convincing but to no avail. A request for an en banc review (meaning the full Sixth Circuit Court reviews the matter) was filed. Surprisingly, the review was granted. The subsequent ruling resulted in six strong and cogent dissents favoring the Petitioner’s position (that IRS must follow the APA). A narrow majority agreed with the IRS. It was clear that some of the judges thought the questions presented by the case deserved SCOTUS review and resolution.
NOW TO THE SUPREMES
A Petition for Certiorari was filed with SCOTUS on January 17th 2020. After a failed objection by the IRS, “cert” was granted on May 4. Your Association joined with four other captive associations to file an Amicus Brief recommending that SCOTUS accept the case for their consideration. Attorneys Kevin Doherty and Tony Greer of Dickinson Wright, PLLC drafted the AB. At this stage, the industry AB primarily stressed the tremendous harm with no real benefit to the IRS that the Notice was doing and would continue to do if not cancelled or rescinded. Seven other non-captive industry interested parties also filed amicus briefs. The APA vs. AIA battle has effects far beyond the tax code sphere which drew the interest of non- industry groups which filed the additional briefs.
Once cert was granted NCCIA swung into action to organize a concerted effort to show industry solidarity opposing the Notice. Almost the entire captive industry realized that SCOTUS review represented a realistic opportunity to get the Notice cancelled. Twenty-one state associations plus SIIA and CICA joined in developing the amicus brief. Doherty and Greer were again tasked with filing an amicus, homing in on where the IRS was wrong regarding the AIA exempting them from honoring the APA. The only amicus brief referred to by a Justice (Thomas) during the oral arguments was our industry brief. We can all be very proud of that.
The oral argument was “virtual” and unlike an actual hearing with everyone in the same room, the questions are put by the justices in order of seniority (after Chief Justice Roberts). Roberts moderated the proceedings. Cameron Norris of DC firm Consovoy McCarthy, PLLC led off for the Petitioner. Since the AIA stops injunction actions with a “purpose” of stopping assessment or collection of a tax, Norris emphasized that stopping the filing of disclosures was the purpose. No tax (here penalty) was even involved, since there was only a penalty if (1) 8886/8918s were not filed as required, AND (2) the IRS elected to assert a penalty. It was noted that no one is aware of any penalties being asserted against anyone to date.
Counsel next emphasized (partly to pre-empt the IRS argument to follow) that the injuries to the Petitioner that would stop if the injunction was granted were the filing costs, not any never asserted penalties. Then, he stressed that the “remedy” the IRS would offer of violate the law, incur the penalty, pay it and then sue for a refund did not reflect a reasonable course of action for any taxpayer because the non-filing was also a crime with possible fines and prison time (and in Sean King’s case loss of law license and CPA license). It is this last point – that the taxpayer’s usual alternative to get a post-event hearing in court – that formed the “equitable” argument against the AIA founded on SC v. Regan, 465 US 367 (1984). This equitable alternative for tossing the AIA prohibition seemed to interest several of the justices.
The IRS side was argued by Jonathan Bond, the Department of Justice attorney presenting the IRS case. Bond tried to counter the Regan viewpoint by noting that the crime feared must have been done “willfully” under Section 7203 and that the taxpayer could send a letter stating they were violating the law only to get a hearing in court and that would cancel the willfulness aspect of the violation. Justice Alito questioned this reasoning. The taxpayer who wanted to test the Notice in any court would have to take on some very severe and dangerous financial and personal risks. Justice Kavanaugh noted that the penalties were a deterrence to challenging the Notice and were “coercive.
On balance, the Petitioner’s position – non-tax injunction purpose and no fair remedy – seemed to resonate effectively with the Justices. The IRS position – the suit’s purpose was to stop penalties (as if taxes) and the taxpayer must risk jail time – was less well received. But, of course, your Association is somewhat jaundiced and biased on the whole Notice mess.
WHAT IS NEXT
Expect no opinion until March at the earliest.
A victory will likely mean a re-hearing by the original District Court judge on the Petitioner’s right to an injunction. The good news is that his denial opinion in 2017 was mainly based on the AIA applying. If SCOTUS says it does not apply, then, since we have already demonstrated irreparable harm, the injunction should be granted. We look forward to that eventuality and also to an opportunity to really engage with the IRS on meaningful guidance for our industry.
INTERESTING COMMENTS DURING THE HEARING
- Roberts to Bond: “if Congress added a $1 penalty to every filing requirement would the AIA mean the IRS never had to follow the APA?”
Bond: yes – will of Congress.
- Roberts to Bond: “is there a presumption in favor of pre-judicial review of new agency rules?”
Bond: No. (Although case law says there is.)
- Thomas to Bond: “define “to assess””. “How attenuated can assessment be from collection?”
Bond: no real answer.
- Thomas to Bond: “is not a tax to raise revenue? Where is the revenue here?”
Bond: Congress said the penalty was a tax in this case. So, no real answer.
- Breyer statement to Bond: “Calling it a tax does not make it one.” Added: “regulatory costs cannot be refunded.” Then, to
Bond: “How stop government action that is causing heavy regulatory costs?” Bond: no real answer.
- Gorsuch statement: “the IRS regulates enormous swaths of our economy” and “the IRS skips APA notice and comment rule 40% of the time.”
Bond: no comment.
NCCIA looks forward to keeping you in the loop as the case progresses.