Sixth Circuit Should Follow Supreme Court’s Precedent and Recognize Limits of Anti-Injunction Act

Today, Cause of Action Institute filed an amicus brief in CIC Services, Inc. v. IRS in the U.S. Court of Appeals for the Sixth Circuit.  At issue in the case is whether the Anti-Injunction Act prohibits courts from reviewing whether the IRS complied with the Administrative Procedure Act (“APA”) when it issued a notice related to captive insurance companies.  We urged to appellate court to reverse the district court’s ruling that the Act blocks the suit and to resist the temptation to extend the D.C. Circuit’s flawed reasoning from Florida Bankers.

Notice 2016-66 and Captive Insurance

The rule at issue is contained in Notice 2016-66.  The IRS believes that small companies are using captive insurance companies (i.e., a type of self-insurance vehicle owned by the company or an affiliate) as a tax shelter.  But the IRS isn’t really sure if they are or what types of captives could be problematic.  So the IRS created a new category of “reportable transaction” known as a “transaction of interest,” which requires companies to proactively disclose when they are using a captive insurance company to self-insure.

The problem is that this creates a recordkeeping and reporting burden on small businesses and threatens fines if they do not comply.  CIC Services, the plaintiff-appellant in the case, estimates it would require hundreds of hours of labor and more than $100,000 to comply with the notice.  Further, “reportable transactions” are a scarlet letter in the tax world, and many businesses would rather avoid the underlying behavior than disclose they are engaging in a “reportable transaction.”

The IRS is doing all of this without notice and comment, without studying the adverse impact of its fishing expedition, and in conflict with Congress repeatedly authorizing captive insurance vehicles for small businesses.  CIC Services is also challenging whether the IRS can create a “transaction of interest” without issuing a formal regulation because Congress has limited the IRS’s ability to make “reportable transactions” to those “as determined under regulations prescribed” by the agency.[1]  A simple notice does not meet this standard.

An Overbroad Use of the Anti-Injunction Act Stands in the Way

The parties’ dispute over Notice 2016-66 and whether it violates substantive and procedural limitations on the agency has all the makings of a rather pedestrian APA case.  This is why we have preenforcement judicial review of agency rulemaking.  Enter the Anti-Injunction Act, which prohibits suits “for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.”[2]  The district court agreed with the IRS that the Act blocked the CIC Services suit.

But Notice 2016-66 deals with neither the “assessment” nor the “collection” of any tax; it creates a reporting requirement.  The U.S. Supreme Court unanimously has held that “notice and reporting requirements precede the steps of ‘assessment’ and ‘collection’” and that suits challenging reporting requirements do not “restrain” those activities and do not trigger the Anti-Injunction Act.[3]    But the D.C. Circuit recently ignored the Supreme Court’s decision in Direct Marketing in Florida Bankers[4] and the Six Circuit may be tempted to extend the D.C. Circuit’s ruling.  CoA Institute submitted an amicus brief in support of a cert petition in Florida Bankers, but the Supreme Court declined to hear the case.

CoA Institute Shows the Court the Consequences of an Overbroad Anti-Injunction Act

The litigants in the case will present the court with all of the issues above.  CoA Institute’s contribution was to introduce the court to the consequences of allowing IRS rulemaking to go unreviewed.  We presented the research underlying our recent investigative report, Evading Oversight: the Origins and Implications of the IRS Claim that its Rules Do Not Have an Economic Impact.  The danger of allowing the IRS to continue to use an over-expansive reading of the Anti-Injunction Act to block judicial review of its rulemakings is that the IRS will continue to ignore the substantive and procedural limitations on its authority.

Congress and the president have established a series of oversight mechanisms to ensure that agencies are complying with procedural requirements, taking public comments into account, and properly mitigating the adverse impacts of their rules, when possible.  But the IRS has erected a series of self-made exemptions from these oversight requirements.  One of those exemptions is at issue in CIC Services: does the IRS have to comply with the APA when it promulgates legislative rules?  A broad reading of the AIA blocks the courts from answering that question and so the IRS continues to flout the rules.

Conclusion

The Sixth Circuit should reject any invitation to extend Florida Bankers, adhere to Supreme Court precedent from Direct Marketing, and reverse the district court’s ruling that the Anti-Injunction Act prevents preenforcement judicial review of whether the IRS complied with the APA when it issued Notice 2016-66.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

[1] 26 U.S.C. § 6707A(c)(1).

[2] 26 U.S.C. § 7421.

[3] Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1131 (2015).

[4] Florida Bankers Ass’n v. Dep’t of Treasury, 799 F.3d 1065 (D.C. Cir. 2015)

Supreme Court Limits Gov’t Power to Charge Criminal Penalties for Unknowingly Obstructing the IRS

Washington, D.C. – The Supreme Court this week issued a ruling protecting all Americans from prosecution for vaguely defined tax crimes. In the case of Carlo Marinello, II v. United States, it clarified a broad statute regarding who can be charged with criminal conduct for obstructing the IRS’s administration of the tax code. Cause of Action Institute (“CoA Institute”) filed an amicus curiae brief in support of Mr. Marinello’s petition for Supreme Court review, and another one during the merits stage, urging a narrow reading of the statute to ensure no one could be charged under it without knowing that he is committing a felony.

CoA Institute President John J. Vecchione: “As Justice Breyer noted, the law Mr. Marinello was charged under could be interpreted to make felonies of routine conduct by everyday American taxpayers and business owners, such as failing to report a payment to a babysitter. Without this important decision, sloppy tax filers could be charged with obstruction with just an allegation that the conduct helped the defendant avoid tax liability. We applaud the Court for reining in such broad and potentially abusive prosecutorial authority, and Cause of Action is proud of its efforts in this result.”

Mr. Marinello owned a small courier service in New York. In 2012, the United States obtained an indictment against him under the criminal tax code, arguing that Mr. Marinello could be guilty of corruptly obstructing or impeding the administration of the tax code by performing acts as common as failing to maintain books and records for his small business, failing to provide his accountant with complete information, and discarding business records, all because he did these acts with the goal of not paying taxes.  However, the tax code already outlaws tax evasion, and it requires that the government prove a heightened criminal intent—that the defendant acted “willfully.”

During oral argument, the Court showed enormous skepticism towards the Government’s position that virtually any act or omission, no matter how slight, could subject one to felony conviction, even though the particular tax code penalties for those actions are misdemeanors. In the Court’s opinion, Justice Stephen Breyer wrote “Just because a taxpayer knows that the IRS will review her tax return every year does not transform every violation of the Tax Code into an obstruction charge.”

The full opinion can be found here.

For information regarding this press release, please contact Zachary Kurz, Director of Communications at CoA Institute: zachary.kurz@causeofaction.org.

 

 

IRS Seeks to Halt Fifth Circuit Appeal of Controversial Inversion Rule, Submits Final Rule for White House OMB Review

In January, Cause of Action Institute released a report highlighting IRS exemptions from various regulatory oversight mechanisms.  This report kicked off a flurry of activity, and Treasury and OMB are now in talks about whether and how the IRS should continue to be functionally exempt from White House review of IRS rulemakings.  A recent development in a closely watched Fifth Circuit case challenging an Obama-era rulemaking on inversions shows the effort may be bearing fruit.

In April 2016, the Obama Administration issued a controversial rule attempting to block inversions, a business reorganization technique designed to provide relief from high U.S. corporate taxes.  The IRS made this rule by issuing a Notice and publishing a proposed rule in the Federal Register.  Because IRS rules are effective from the date of the Notice, the agency was in no hurry to complete the Administrative Procedure Act (“APA”) rulemaking process that it had begun with the proposed rule and request for comment.  The Obama Administration ended without the rule ever being finalized but the Notice continued to be in effect.

The Chamber of Commerce sued the IRS over the inversion rule, claiming that the agency failed to comply with APA rulemaking procedures and that the substantive rule was in excess of its statutory authority.  The IRS tried to use the Anti-Injunction Act (“AIA”) to block the suit, as it often does.  But, in October 2017, a district court in Texas ruled that the AIA did not deny the court jurisdiction over the case and that the IRS did indeed violate the APA.  The court than invalidated the temporary rule.  The IRS promptly appealed to the Fifth Circuit.

IRS Moves to Stay Appeal of Inversion Rule Decision

But, in a twist, last week the IRS moved the appellate court to stay the proceedings because it was restarting the long-dormant APA process and finalizing the underlying rule.  In its motion seeking a stay (or a 45-day extension), counsel for the IRS wrote that it needs “to reevaluate whether [the IRS] should proceed with th[e] appeal[.]”  The IRS also told the Fifth Circuit that:

Having completed notice and comment, Treasury and the IRS plan to finalize the proposed regulation. That process is nearly complete. A draft of the final regulation has been prepared, and it has been submitted to the Office of Management and Budget for review. The final regulation would replace the temporary regulation that is at issue in this case, which will be removed.

Accordingly, we respectfully request that briefing of this case be stayed until a final regulation is published in the Federal Register, during which time the Government will evaluate whether it should proceed with this appeal or dismiss it.

This is an interesting development.  The inversion rule remains controversial and whether it is still necessary, following the recent changes to the corporate tax rate, is an open question.  But it now appears that Treasury and IRS are rethinking whether it is wise to press the government’s current disadvantage on the AIA and APA compliance in the Fifth Circuit.  This case could provide a clear circuit split with the D.C. Circuit (following Florida Bankers, which held the AIA blocked pre-enforcement review in APA challenges to IRS rules) on the proper application of the AIA.  So we may be seeing a strategic retreat by the IRS trying to limit the damage from its earlier loss in the district court.  But it is good to see that the agency is involving OMB in this finalization process.

We’ll have to wait to see what OMB says about the rule, whether the IRS does indeed finalize the rule, what form that final inversion rule will take, whether the Fifth Circuit grants the stay, and, ultimately, whether the IRS will back out of this appeal.  Stay tuned.

Update: The Fifth Circuit did not act on the stay motion before the deadline for the IRS to file its opening brief, which it timely did on March 16.

Update 2: On March 22, the Fifth Circuit denied the stay motion and the case is proceeding.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

 

17 Groups Urge Trump Administration to End Unlawful IRS Practice of Dodging Oversight

Washington, D.C. – Cause of Action Institute (“CoA Institute”) today led a coalition of 17 organizations in sending a letter to President Trump and senior administration officials urging them to hold the IRS accountable by working to end the agency’s practice of dodging oversight of its rules.

CoA Institute recently issued an investigative report titled Evading Oversight: The Origins and Implications of the IRS Claim That Its Rules Do Not Have an Economic Impact, detailing how the IRS created and expanded a series of self-bestowed exemptions from three important regulatory oversight mechanisms.  The IRS created these exemptions by claiming that the economic effects of its rules flow from the underlying statute and not its regulatory choices.

The letter states:

This IRS practice denies Congress information about IRS major rules that should be reported to the Government Accountability Office under the Congressional Review Act.  It also hinders the White House’s ability to fulfill its constitutional obligation to supervise the Executive Branch by conducting oversight of IRS regulations pursuant to Executive Order 12,866.  And it impacts the public’s right to learn about and comment on the economic impact of the IRS rules that are subject to the Regulatory Flexibility Act… The IRS should live by the same rules of administrative law and agency oversight as the rest of the Executive Branch.

The letter was sent to President Trump, Secretary of the Treasury Steven Mnuchin, Office of Management and Budget (“OMB”) Director Mick Mulvaney, and Office of Information and Regulatory Affairs (“OIRA”) Administrator Neomi Rao.

The letter urges the Department of the Treasury and OMB to withdraw from a decades-old agreement allowing the IRS to avoid White House review of its rulemakings. Last week, two former heads of OIRA, Susan E. Dudley who served under President George W. Bush and Sally Katzen who served in the Clinton administration, wrote in The Wall Street Journal that this longstanding agreement has been abused and agreed it should be reconsidered.

Further, the coalition letter firmly holds that the IRS should not be permitted to claim that the economic impact of its rules is due to the underlying statute and not its regulatory choices.

The full letter can be found here.

The following groups signed:

American Business Defense Council
Dick Patten, President

American Commitment
Phil Kerpen, President

Americans for Prosperity
Brent Wm. Gardner, Chief Government Affairs Officer

Americans for Tax Reform
Grover Norquist, President

Association of Mature American Citizens
Dan Weber, President & CEO

Campaign for Liberty
Norm Singleton, President

The Carlstrom Group
Bob Carlstrom, President

Cause of Action Institute
John Vecchione, President & CEO

Center for Freedom and Prosperity
Andrew F. Quinlan, President

Council for Citizens Against Government Waste
Tom Schatz, President

Family Business Coalition
Palmer Schoening, Chairman

Freedom Partners Chamber of Commerce
Nathan Nascimento, Executive Vice President

FreedomWorks
Jason Pye, Vice President of Legislative Affairs

Hispanic Leadership Fund
Mario H. Lopez, President

National Taxpayers Union
Pete Sepp, President

Taxpayers Protection Alliance
David Williams, President

Tea Party Patriots
Jenny Beth Martin, President

 

For information regarding this press release, please contact Zachary Kurz, Director of Communications at CoA Institute: zachary.kurz@causeofaction.org.

 

Treasury and OMB are Reconsidering IRS Oversight Exemption

I’ve been writing about the series of self-created exemptions the Internal Revenue Service (“IRS”) has been using to evade oversight of its rulemakings.  One of those exemptions is tied to White House review pursuant to Executive Order 12,866 at the Office of Information and Regulatory Affairs.  Today, for the first time, the agency publicly revealed that it is in talks with the Office of Management and Budget (“OMB”) to review that exemption.

The Trump Administration’s Departments of Health and Human Services (“HHS”), Labor, and the Treasury just released a proposed rule that would allow Americans to buy short-term health insurance plans that would not be affected by the Patient Protection and Affordable Care Act’s mandates that are driving up premiums and limiting choice.  Housed within that proposed rule is a microcosm of the problem I’ve been highlighting.

On pages 17–28, HHS and Labor conduct a series of regulatory assessments, including an explanation of what the costs, benefits, advantages, and disadvantages of the proposed rule are.  They even include an analysis of the number of enrollees likely to take advantage of the proposal and the impact on the individual market exchanges.  IRS?  Not so much.  As has been its practice, the IRS simply claims that “[c]ertain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866 . . .  Therefore, a regulatory impact assessment is not required.”

However, the IRS also reveals that CoA Institute’s efforts to urge the Trump Administration to review the exemption is starting to bear fruit.  The IRS states that “[p]ursuant to Executive Order 13789, the Treasury Department and OMB are currently reviewing the scope and implementation of the existing exemption.”

IRS Section from Proposed Rule on Short-Term Insurance

Here’s hoping they go further than simply review the scope and implementation, and resolve to end the practice that allows the IRS to give short shrift to the impacts of its rules, while other agencies, like HHS and Labor here, do their homework.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

Congress Investigates IRS for Trying to Evade Oversight

Over the past two weeks, Senate Committee on Homeland Security and Governmental Affairs (“HSGAC”) Chairman Ron Johnson and HSGAC Subcommittee on Regulatory Affairs Chairman James Lankford have sent two letters to investigate the Internal Revenue Service (“IRS”) claim that any economic impact from the agency’s rules is due to the underlying statute and not its regulatory choices.  Cause of Action Institute (“CoA Institute”) profiled the IRS claim, its implications, and the role of the White House Office of Information and Regulatory Affairs (“OIRA”) in a recent investigative report and op-ed.

HSGAC Letter to OIRA

On February 1, 2018, Chairmen Johnson and Lankford sent a letter to OIRA urging the White House regulatory office to reconsider a “longstanding agreement between [OIRA] and the Department of the Treasury to exempt regulations issued by the [IRS] from the requirements contained in Executive Order 12866.”

In 1983, OIRA, under President Reagan, agreed to create a three-tiered system to review IRS rules, which has resulted in very few IRS rules being sent to the White House regulatory office for pre-publication review.[1]  The IRS finally released the long-secret agreement in response to a Freedom of Information Act request from CoA Institute.  The Government Accountability Office (“GAO”) has also called for the agreement to be revisited.

In their letter, Chairmen Johnson and Lankford:

strongly urge[d] [OIRA] to revisit the regulatory agreement between OIRA and Treasury, as directed by President Trump’s EO 13789, with a critical eye as to why this agreement is necessary.  [They] also encourage[d] OIRA to implement all the recommendations in GAO’s September 2016 report and provide a full explanation to the Committee and Subcommittee in the event that OIRA declines to implement any of GAO’s recommendations.

The Chairmen also announced that they “intend[] to hold an oversight hearing in the very near future regarding OIRA activities.  The issues outlined in this letter will likely constitute a major part of this hearing.”

This effort is important because OIRA plays a key role in coordinating and legitimizing Executive Branch regulatory actions.  If an agency is able to make federal regulatory policy without oversight from the President, that policy not only lacks independent review but also political legitimacy.  OIRA is well-positioned to rein in the IRS and demand that the agency begin to do the same pre-publication regulatory cost-benefit analysis and economic-impact analysis as other federal agencies.

It will be interesting to hear OIRA Administrator Neomi Rao’s thoughts on the long-standing, long-secret memo at a congressional oversight hearing, as I do not believe OIRA as an institution has spoken on the issue since 1993.  Hopefully, Administrator Rao will take this opportunity to review and end the agreement between OIRA and Treasury and bring the IRS into line with other agencies.

HSGAC Letter to IRS

In addition, on February 13, 2018, Chairmen Johnson and Lankford sent a letter to Acting IRS Commissioner David Kautter presenting many of the findings from CoA Institute’s report.[2]  In their letter, the Chairmen summarized the report’s central finding:

[CoA Institute’s] report found that the IRS “takes the position that its rules have no economic effect because any impact is attributable to the underlying law that authorized the rule, not the agency’s decision to issue or alter the rule.”  The IRS’s position apparently dates back nearly 20 years, when the IRS Office of Chief Counsel issued a notice taking this position.  The report notes that while the IRS initially limited its economic analysis exemption to only “interpretative regulations and revenue impacts, both limitations fell away over time.”

The Chairmen asked the IRS a number of oversight questions, to learn more about the agency’s behavior and any justification it may have.  First, they asked whether “the IRS has conducted any retrospective economic impact analyses of regulations that did not receive an initial economic impact analysis.”  I am dubious that the IRS has done so.  If it believes its rules are exempt from initial economic impact analysis, I doubt its going back to see if it was right or wrong.  Any retroactive analysis likely would just shift blame back to the underlying statute again.

Second, the Chairmen noted that in 2016 “the Small Business Administration’s [(“SBA”)] Office of Advocacy wrote to the IRS disputing the agency’s assertion that the IRS’s regulations are not subject to the requirement to conduct economic impact analyses.”  The Chairmen want to know if the IRS ever responded to SBA or if any other agencies have pushed back on the IRS claim.

Finally, and perhaps most importantly, the Chairmen asked the IRS to “explain the process by which a determination is made as to whether the agency will or will not conduct an economic impact analysis on a proposed regulation.”  This final question is critical because, up to now, the IRS has provided very little explanation of how it goes about making the determination in an individualized case that a certain rule’s impact flows from the statute.  CoA Institute’s work in this area shows that the agency developed these self-bestowed exemptions over time, found them a convenient tool to avoid additional pre-publication work, and rarely gives more than a boilerplate claim that the exemption applies to certain cases.

It is heartening to see that Chairmen Johnson and Lankford are beginning the oversight process on this issue.  I look forward to seeing the responses from OIRA and the IRS.

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.

[1] In 2016, CoA Institute found that “over the past ten years, the IRS has submitted only eight rules to OIRA for regulatory review and deemed only one of those rules significant.  Those eight rules are less than one percent of the final rules the IRS published in the Federal Register over the same period.”

[2] President Trump recently nominated Chuck Rettig to be the new IRS Commissioner, and CoA Institute has urged the Senate Finance Committee to press Mr. Rettig on whether he will end this IRS practice of evading oversight of its regulatory actions.

Rettig Nomination Gives Congress Chance to Hold IRS Accountable

Last month, Cause of Action Institute (“CoA Institute”) released an investigative report detailing a pernicious practice at the Internal Revenue Service (“IRS”).  The agency claims that none of the economic impact caused by its rules is attributable to its regulatory choices. Instead it says the impact flows from the underlying statute.  The IRS uses this claim to evade three important oversight mechanisms.  When we released the report, we called on Congress to press whomever President Trump nominated to be the next IRS commissioner to promise to reform this practice.  Well, Trump just nominated Chuck Rettig to head the agency.  So it’s time for Congress to stand up and hold the IRS accountable for its decades-long practice of playing by its own rules.

CoA Institute just sent a letter to Senate Finance Committee Chairman Orrin Hatch and Ranking Member Ron Wyden urging them to press Mr. Rettig on this issue during their face-to-face meetings and at a public hearing.

View the Letter Concerning Mr. Rettig’s Nomination Below

James Valvo is Counsel and Senior Policy Advisor at Cause of Action Institute.  He is the principal author of Evading Oversight.  You can follow him on Twitter @JamesValvo.