Not a lot of tax cases make it to the Supreme Court, but there were a few decisions from the Court near the end of their 2020/2021 term that at least touch on tax issues. The cases involve deference to IRS regulations and pronouncements, state taxation of remote workers, and the Affordable Care Act.
CIC Services, LLC
The ability to challenge IRS regulations and other pronouncements has seen some expansion in recent years. Courts generally give deference to IRS regulations if they are a reasonable interpretation of an ambiguous statute (Chevron). Interpretative regulations by the IRS have generally been considered to not require the notice and comment requirements of the Administrative Procedures Act (APA). However, it is not always clear what is an interpretive regulation as opposed to legislative regulation. Some courts have found that the IRS failed to follow APA requirements, although the Supreme Court in cases such MayoAltera have upheld IRS regulations.
CIC Services involved the Anti-Injunction Act, which in general, to protect the flow of federal revenues, requires taxpayers to first pay a tax and file a claim for a refund for access to the federal courts. Taxpayers can access the Tax Court without paying the tax first. CIC Services involved an IRS notice rather than a regulation, and notices receive less deference from the courts than regulations.
CIC Services was engaged in facilitating micro-captive insurance transactions, which the IRS has determined to be a reportable transaction. Notice 2016-66 imposed significant reporting requirements involving micro-captive transactions, as well as possible civil and criminal penalties for failure to comply. The IRS considered the civil penalties to be a tax. CIC Services filed suit in U.S. District Court contending that the reporting requirements of the notice were unduly burdensome. The IRS took the position that the Anti-Injunction Act prohibited suit because CIC Services was in part trying to restrain the assessment or collection of a tax.
In a unanimous opinion, the Supreme Court held that a suit to enjoin Notice 2016-66 was not barred by the Anti-Injunction Act. Key elements involved in the Supreme Court’s decision were that CIC Services was primarily challenging burdensome and costly reporting requirements, not a tax that is several steps down in the process; CIC Services had stated that it would comply with the notice until overturned, meaning that it would never become liable for the civil penalty; and no one would not comply with the notice to incur the civil penalty because of the additional threat of criminal penalties.
The Supreme Court decision is fairly narrowly drawn based on the particular facts of this case, but it does open the door for potential challenges to other burdensome IRS pronouncements that focus on the cost of compliance rather than a possible tax obligation.