In CIC Services, LLC v. IRS, 583 U.S. ___ (2021), here, the Court held that the Anti-Injunction Act (§ 7421(a)) did not preclude a contest by a “material advisor” of IRS Notice 2016–66 requirement to report micro-captive transactions. See Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here. Accordingly, the Supreme Court remanded the case to the Court of Appeals which remanded it to the district court.
In CIC Services, LLC v. IRS (E.D. Tenn. No. 3:17-cv-110 9/21/21), CL here, the district court held that the Notice was a legislative rule that required promulgation by notice and comment regulation. Based on that holding, the court found the requirements for an injunction were met and that the injunction should be applied with respect to CIC. I suppose that means, practically, that the IRS cannot impose penalties for any failure by CIC to comply with the requirements of the Notice (Note, however, that the opinion says that “CIC also notes that, to date, it has complied with the Notice’s requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year.”).
This is a major win for the tax shelter industry but probably not the last word in this saga.
Without getting into the nitty-gritty on the application of the APA’s legislative/interpretive distinction (upon which turns the notice and comment regulation requirement), I suppose that the going forward solution for the IRS would be to use the immediate effect Temporary Regulation, with "good cause statement," process with contemporaneous Proposed Regulations for the notice and comment process. The APA requirement for good cause is “when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.” 5 U.S.C. § 553(b)(B). Potentially abusive tax shelters should be sufficient for immediate effect under this provision.
I am not sure that the court correctly
determined that the Notice was a legislative rule requiring notice and comment
(or good cause statement). Because the
court made the legislative determination with sound bites rather than detailed
analysis, I won’t address that here. I
suppose the Government will appeal to the Sixth Circuit on an expedited basis
because of the injunction.
The CourtListener (CL) docket entries for the case are here.
JAT Comments (added 9/22/21 2:30pm:
