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  • Gary Mauney

Micro-Captive Shelter Promoters seek Tax Break from U.S. Supreme Court

Tax Shelter Promoters hate the IRS Disclosure and Reporting Requirements and think the Federal Courts Should Make Them Go Away. Let's hope not.

Micro-Captive tax shelter promoters have been given a U.S. Supreme Court hearing to argue that IRS reporting and and disclosure requirements are not really geared toward "tax collection or assessment." Accordingly, the promoters argue, the requirements should be deemed illegal. No, I'm not kidding, they are really arguing that. Of course, the Micro-Captive promoters are at the U.S. Supreme Court for a reason. They lost big at the federal district court level and then again at the Sixth Circuit appellate court. They should lose big again at the U.S. Supreme Court.

CIC Services LLC v. Internal Revenue Service - Now Before the U.S. Supreme Court

The case is CIC Services LLC v. Internal Revenue Service. CIC Services is a "risk management" firm that "advises" captive insurance companies. In my line of work, we call people like CIC tax shelter promoters. And right now, one of CIC's tax shelter is under fire from the IRS, and undoubtedly, CIC's clients are very unhappy campers. Micro-Captive tax shelters have been Tax Court losers, and so, the promoters are seeking sanction to hide their existence from the IRS.

CIC Services hates the IRS disclosure and reporting requirements and thinks the federal courts should make them go away

At issue in CIC Services LLC v. Internal Revenue Service is the scope of the Anti-Injunction Act and, more specifically, what constitutes the collection or assessment of taxes for purposes of the statute. CIC Services’ lawsuit relates to IRS Notice 2016-66, by which the federal government: (1) Identified certain transactions entered into between taxpayers and related captive insurance companies as having the potential for tax avoidance or evasion (Micro-Captive transactions); (2) labeled Micro-Captive transactions as “transactions of interest;” and, (3) subjected micro-transactions to reporting requirements and potential penalties associated with “reportable transactions.”

Notice 2016-66 labelled micro-captive transactions as potentially abusive tax shelters, much to the dislike of CIC Services. In response, CIC sued the IRS in the United States District Court for the Eastern District of Tennessee, seeking to render Notice 2016-16 and its mandates invalid. CIC Services made the technical argument that in issuing the Notice, the IRS failed to follow the notice-and-comment rulemaking and congressional review procedure for legislative rules as set forth in the Administrative Procedure Act. The trial court dismissed CIC Services’ complaint for lack of subject matter jurisdiction, holding that the Anti-Injunction Act divested it of jurisdiction because the lawsuit was “for the purpose of restraining the assessment or collection of any tax.” CIC Services appealed this ruling to the Sixth Circuit, arguing that the Anti-Injunction Act did not prohibit pre-enforcement review of Notice 2016-66 because it is not geared toward “tax collection or assessment;” rather, CIC Services argued that the Administrative Procedure Act compels such a review. For its part, the IRS contended that compelling taxpayers to report on the use of potentially questionable tax shelters (read: Micro-Captive transactions) is (and was) related to tax collection and therefore protected by the Anti-Injunction Act. The Sixth Circuit agreed, finding that the Anti-Injunction Act barred CIC Services’ litigation. As a result, CIC Services petitioned the U.S. Supreme Court, which allowed review. The case is fully briefed and is set for argument on December 1, 2020.

Let's not pretend this case is about the rights of "regular taxpayers"

Let’s not kid ourselves, this is a case about tax shelters. Regular taxpayers don't buy Mirco-Captive tax shelters. The case presents a narrow legal question: May people and companies that promote abusive tax shelters sue to block enforcement of monetary penalties for failing to disclose those tax- avoidance transactions to the IRS? But the practical question is far broader. At stake is whether the tax-shelter industry will be permitted to use waves of strategic pre-enforcement lawsuits to hobble the IRS’s efforts to combat abusive tax shelters.

The narrow legal question can and should be decided based on the plain statutory text. CIC Services seeks to permanently restrain the IRS from imposing penalties for failure to disclose certain “Micro-Captive insurance” transactions that taxpayers use to claim losses. CIC Services even advertises these transactions as “tax shelters.” Congress has deemed these penalties to be “taxes” for purposes of the Anti-Injunction Act. See I.R.C. § 6671(a).

And that Act expressly bars any “suit for the purpose of restraining the assessment or collection of any tax” by “any person.” Id. § 7421. CIC Services’ suit therefore seeks to “restrain” the “assessment” of a penalty that Congress has defined as a “tax.” That alone is enough to resolve this case.

The IRS Disclosure and Reporting Requirements and Enforcement Statutes Help Keep Abusive Tax Shelters Out of the Shadows

But broader historical context and practical consequences confirm why it is important for the Supreme Court to follow the plain statutory text of the Tax code. This case does not arise in a vacuum. It arises against the backdrop of a decades-long struggle between the federal agency charged with responsibility for administering and enforcing the internal revenue laws and an industry consisting of accountants, lawyers, bankers, insurance companies, and others working in concert to defeat those laws.

A ruling for CIC Services would mark a resounding win for the tax-shelter industry and a significant setback for the government in its ongoing effort to reveal and challenge abusive tax shelters. It could cost the federal treasury billions of dollars annually. CIC Services’ effort to frustrate tax assessment is exactly the kind of demand that the Anti-Injunction Act seeks to prevent. Rather than hand the tax-shelter industry a powerful new tool to thwart the assessment of taxes on a massive scale, the Supreme Court should apply the statute as written and affirm the Sixth Circuit’s well-reasoned decision.

Were you convinced to make a tax-advantaged investment in something like a Micro-Captive Tax Shelter labelled "Potentially Abusive" or "Unlawful" by the IRS?

Attorney Gary Mauney of Mauney PLLC is one of the most experienced tax shelter litigators in the United States. He has successfully litigated or settled tax shelter cases against the largest accounting, banking, and law firms in the United States. Do not be fooled, tax shelter promoters will often argue that a malpractice case will harm your chances with the IRS, knowing all along that the tax shelter is a factual fraud or that it lacks economic substance. If you think you may have been the victim of tax shelter malpractice or fraud, contact Gary Mauney at Mauney PLLC for a confidential evaluation of your situation. Email: Telephone: 704/945-7185.


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