Opinion analysis

The Supreme Court issued on Monday View in CIC Services v. Internal Revenue Service. The case involved whether the “Prohibition” generally prohibits litigation “for the purpose of restricting assessment or collecting any tax”, and whether it prohibits pre-enforcement review of the IRS administrative notice, which is designed to collect information about certain suspected tax avoidance transactions . In the 2021 Americans’ submission of the federal income tax deadline, the court ruled that AIA will not prohibit CIC from filing a pre-enforcement lawsuit against the IRS notice by 9-0. Judge Elena Kagan made an opinion for the court. Judges Sonia Sotomayor and Brett Kavanaugh each issued separate opinions.

The case involved reporting requirements. According to the law, taxpayers and their consultants must report certain transactions to the IRS. These “reportable transactions” are usually transactions that the IRS believes may be abused, and the agency identifies them in the IRS notice, which is a secondary regulatory guide. The Tennessee company CIC advised clients on transactions that the IRS determined should be reported in Notice 2016-66. CIC hopes to attack Notice 2016-66 because it violates the requirements of the Administrative Procedure Law regarding the establishment of notice and comment rules. But the government argued that AIA had waived federal court jurisdiction on the matter before CIC actually violated the notice and the IRS assessed the fine. Failure to comply with the notice may result in monetary penalties (defined as taxes for the purposes of the Internal Revenue Law and AIA) and criminal penalties.

When overturning the interpretation of AIA by the U.S. Court of Appeals for the Sixth Circuit, Kagan pointed out that the court should focus on the purpose of litigation, that is, to “mitigate the requirements of litigation.” Here, the court held that, based on the complaint, the lawsuit is a lawsuit that does not prohibit tax penalty. On the contrary, this is a lawsuit that challenges the legality of the notice.

The court gave three reasons and ruled that the lawsuit prohibiting enforcement of the notice is not a tax prohibition lawsuit. Kagan wrote: “First of all, the notice sets out certain reporting obligations, and the costs incurred are separated from statutory taxes and collected separately.” Many of these obligations are expensive and have nothing to do with any taxes.The penalty is “after-effect, not [the] substance”.

Second, the court pointed out that the reporting requirements and tax penalties are too far apart. To bear tax liability: (1) CIC will need to retain the required information, (2) IRS will need to determine that CIC has violated reporting requirements, and (3) IRS will need to use its discretion to impose fines. . The series of events that depend on the judgment of the US Internal Revenue Service is too weak.

Third, the court said that the separate criminal penalties made this no longer a taxation case. Criminal penalties are not taxes. In addition, without the pre-enforcement review, the parties will have to face the risk of criminal prosecution. “This is not a risk taken by ordinary people, even if they have to challenge the most cumbersome regulations,” Kagan wrote.

At the closing ceremony, the court stated that the challenge to the regulatory tax must still belong to the AIA, but this challenge is a challenge to “regulatory tasks-reporting requirements-separate from any taxes.”

At the same time, Sotomayor only pointed out that if China Investment Corporation is a taxpayer instead of a tax consultant, the situation may be different. Taxpayers may not have the fees required by consultants to collect and provide their own financial information. In this way, the lawsuit against the notice is more likely to be “a lawsuit “to limit” non-compliance with the prescribed tax.”

Finally, Kavanaugh wrote some speeches on the vague regulatory tax issue. He said that AIA distinguishes between “pre-enforcement litigation that disputes the regulatory part of the regulatory tax. Since the required reduction or exemption will inevitably violate tax collection or taxation, it is still prohibited” and “pre-enforcement lawsuits that challenge patent tax litigation”. Regulations supported by tax penalties may be implemented because the required relief violates an independent legal obligation. “