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Tax & AccountingSeptember 01, 2021

September Tax Trends: Supreme Court’s End of Term Decisions Involving Taxes

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.

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State of New Hampshire v. Commonwealth of Massachusetts

In response to the COVID pandemic, Massachusetts adopted a regulation that persons who were working in Massachusetts prior to the pandemic would continue to be subject to Massachusetts income taxes even if they were temporarily working remotely in another state. New Hampshire, which does not have an income tax, asked the Supreme Court to address the issue as a matter of original jurisdiction, without the benefit of trials and appeals through the lower courts.

The Supreme Court declined to take the case without explanation. For the present, this leaves in place remote worker laws and regulations in states such as New York and Massachusetts. While the Massachusetts regulation was a temporary COVID pronouncement, New York’s law is a permanent law taxing remote services based on the employer’s place of business, unless the services are required to be performed out-of-state other than for the convenience of the employee, and whether there is a bonafide employer office in the remote jurisdiction.

It has been suggested that New Jersey, which does have an income tax, may file an action challenging New York’s statute in order to try to get a more definitive ruling on the issue. Individual taxpayers in New Hampshire or New Jersey might also file actions challenging these requirements, but the rapid decision that New Hampshire was hoping to achieve now appears unlikely.

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California, et al. v. Texas, et al.

Texas and several other states and a couple of individuals filed suit in District Court in Texas contending that the elimination of the individual mandate by Congress following enactment of the Affordable Care Act made the Affordable Care Act unconstitutional. The District Court held that the plaintiffs had standing to pursue the case and agreed that the Affordable Care Act was now unconstitutional, but deferred enforcement pending appeal to the Fifth Circuit.

The Fifth Circuit agreed that the plaintiffs had standing but sent the case back to the District Court for a more complete analysis of whether the elimination of the individual mandate required the entire Affordable Care Act to fall. Because the Trump Administration was backing the plaintiffs in the litigation, California and other states, as well as the House of Representatives, joined an appeal to the Supreme Court to uphold the Affordable Care Act.

The Supreme Court stopped at the standing issue. It held in a seven to two decision, drawing four conservative members of the court, that the plaintiffs lacked standing to bring the case because they had not suffered any harm that the Court could remedy because the penalty for failing to buy health insurance had been reduced to zero. The Supreme Court has thus not reached the merits of the case but has allowed the Affordable Care Act to stand.

While this represents the third time that the Affordable Care Act has survived a Supreme Court challenge, it may be the last attempt to fully repeal the law as unconstitutional. One of those appeals upheld the Affordable Care Act on the basis that the individual mandate was a tax and not a penalty. If Texas, the other plaintiff states and the two individual plaintiffs lack standing because they were not harmed, with the individual mandate currently set at zero, it is not clear that any other plaintiff can come forward and assert harm from the law.

There have been assertions that the fight against the Affordable Care Act will continue, but they may be confined to more piecemeal attacks on particular aspects of the law, with the hope of eliminating the law entirely through the courts much diminished. It remains possible that a future Congress could repeal the law, but repeated Congressional efforts at repeal have failed since the law was enacted in 2010.

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Mark Luscombe
Principal Federal Tax Analyst
Mark Luscombe, a CPA and attorney, is the principal federal tax analyst for Wolters Kluwer Tax & Accounting. He is the current chair of the Important Developments Subcommittee of the Partnership Committee of the American Bar Association Tax Section and speaks on a wide range of tax topics. He authors monthly columns in Accounting Today and TAXES magazine. Prior to joining Wolters Kluwer, he was in private practice with several Chicago-area law firms where he specialized in taxation.
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