District Court Allows Lawsuit Challenging IRS Rulemaking Procedure to Go Forward

(Parker Tax Publishing January 2020)

A district court held that a lawsuit against the IRS, brought by the owner of a foreign corporation, for the IRS's alleged failure to carry out the required small business impact evaluations required by the Regulatory Flexibility Act and the Paperwork Reduction Act before issuing regulations to implement transition tax provisions under Code Sec. 965 was not barred by lack of standing or jurisdiction. The court found that the costs the taxpayer claimed it would incur in complying with the regulations was sufficient to establish that the taxpayer had standing to bring the lawsuit. Silver v. IRS, 2019 PTC 484 (D. D.C. 2019).

In January of 2019, the IRS issued final regulations under Code Sec. 965 (T.D. 9846) to implement the transition tax provisions applicable to controlled foreign corporations owned by U.S. persons that were enacted by the Tax Cuts and Jobs Act of 2017 (TCJA).

Monte Silver is the sole shareholder of Monte Silver, Ltd., a company based in Israel. Silver, who asserted he was subject to the TCJA's transition tax provisions, sued the IRS in a district court to challenge the IRS's alleged failure to carry out required small-business impact evaluations under the Regulatory Flexibility Act and the Paperwork Reduction Act. Silver said he was injured due to the costs associated with complying with the TCJA's transition tax regulations, which include information collection and recordkeeping obligations. He asserted that the regulations imposed significant burdens on his business and other small businesses, including forcing small businesses to spend enormous amounts of time analyzing and complying with the regulations. Silver said he would incur compliance costs for years to come, even though he did not report any transition tax liability.

In a motion to dismiss, the IRS argued that the court lacked subject matter jurisdiction because Silver lacked standing and the Anti-Injunction Act prohibited the lawsuit. The IRS contended that Silver's quarrel was with the TCJA, not the IRS, and that any injury stemmed from the TCJA itself rather than the regulations. The IRS also argued that the Anti-Injunction act barred the lawsuit because invalidating the challenged regulations would directly prevent the collection of taxes.

The district court denied the IRS's motion and held that Silver had standing and that the Anti-Injunction Act did not preclude his action. The court found that because Silver alleged a procedural injury, he could establish standing by showing that the IRS violated a procedural right designed to protect his interests and that it was plausible that the procedural breach will cause a concrete injury to Silver's own interest. The court said that Silver's assertions of the costs he would incur in complying with the regulations plausibly established a concrete injury to support standing.

The court rejected the IRS's causation argument, finding that it fundamentally misconstrued Silver's claims. In the court's view, Silver was not challenging any specific regulation that might or might not be traceable to the TCJA, but rather that the IRS neglected to undertake procedural measures designed to protect small businesses like Silver's from the burden of unwieldy and cost-intensive regulations - specifically, the publishing of a regulatory flexibility analysis and a certification that the regulation reduced compliance burdens on small businesses. The court found that Silver's alleged injuries were traceable to the IRS's purported violation of these statutory requirements, not the TCJA, and causation was therefore easily satisfied.

The court also rejected the IRS's argument that the Anti-Injunction Act precluded the lawsuit. The court explained that the Act bars judicial review of lawsuits filed for the purpose of restraining the assessment or collection of any tax. The purpose of the Act, the court found, is to protect the government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference and to require that the legal right to the disputed sums be determined in a suit for refund. The court said that the question of whether the Act prohibits a lawsuit depends on whether the action is fundamentally a tax collection claim, and that determination requires a careful inquiry into the remedy sought, the statutory basis for the remedy, and any implication the remedy may have on assessment and collection.

The court found that Silver did not seek a refund and was not seeking to impede revenue collection. Instead, the court said, Silver challenged the IRS's adoption of regulations without first conducting statutorily mandated reviews designed to lessen the regulatory burden on small businesses. The court noted that the relief sought by Silver was simply to compel the IRS to do what the law required, and tax revenues and their collection were, in the court's view, unaffected by such relief. The court therefore concluded that the Anti-Injunction Act presented no barrier to Silver's claims. The court also noted that it need not decide at this stage whether the greater relief sought by Silver - staying enforcement of the regulations until the IRS complied with its statutory duties - would run afoul of the Anti-Injunction Act. The court concluded that it need address that issue only if Silver prevails on the merits.

For a discussion of the taxation of U.S. shareholders of controlled foreign corporations, see Parker Tax ¶201,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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