IRS Penalty Case Faces Supreme Court Scrutiny

The headquarters of the IRS. (Courthouse News photo/Jack Rodgers)

WASHINGTON (CN) — The Supreme Court agreed Monday to decide whether courts can pre-emptively block federal regulatory penalties that meet the definition of a tax.

CIC Services, a consulting firm that specializes in captive insurance companies, filed the suit here after the IRS issued new reporting requirements for certain types of transactions related to that industry.

The 2016 regulation comes with the threat of financial penalties for violating the new mandate, which CIC Services contends amounts to a violation of the Administrative Procedure Act.

For the IRS, however, CIC’s suit is barred by the Anti-Injunction Act, a post-Civil War law that prevents courts from blocking the collection of taxes. 

Ultimately it was the IRS that prevailed. After a federal judge in Tennessee held that the penalty for not complying with the reporting requirement qualifies as a tax, the Sixth Circuit affirmed, and CIC petitioned the Supreme Court for a writ of certiorari.

Per their custom, the justices did not issue any comment Monday in taking up the case.

In asking the justices to take up the case, CIC Services said the IRS had effectively insulated itself from the critical legal protections in the Administrative Procedure Act that allow regulated parties to sue before they violate any federal regulations. 

Citing Supreme Court precedent, the company argued its suit does not run against the Anti-Injunction Act because it is not challenging the tax penalty, but the reporting requirements themselves. 

“Here, CIC challenges the reporting requirements — not some hypothetical tax penalty,” the company stated in its brief. “Those existing reporting requirements cause CIC significant injury. Indeed, the tax penalty is largely irrelevant to CIC because CIC has never done anything to trigger it.”    

Federal agencies cannot avoid judicial review of their regulations simply by enforcing them with the threat of a tax penalty, the company argued.

But the IRS contends that the Anti-Injunction Act is on point since blocking the reporting requirements would interfere with the collection of a tax. Any party assessed the penalty could challenge the reporting requirements in its suit seeking a refund, the agency argued in an opposition brief

“Here, petitioner’s evident objective is to obtain a judicial order ensuring that, if it fails to report and maintain records concerning the micro-captive transactions addressed by notice 2016-66, it will not be subject to statutory penalties that the code deems to be taxes,” the IRS brief states, referring to the regulation. “Petitioner cannot escape the Anti-Injunction Act’s effect by styling its suit as one ‘challeng[ing] only the regulatory aspect of a regulatory tax.'”

Patrick Strawbridge, an attorney for CIC Services with the Boston firm Consovoy McCarthy, did not immediately return a request for comment. 

A Justice Department spokesman declined to comment Monday, as did a representative for the IRS.

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