David vs Goliath: The CIC Services Supreme Court Victory Over the IRS
In a David vs. Goliath win, the Supreme Court of the United States granted CIC Services LLC a significant victory for taxpayers and their advisors. In a unanimous opinion written by Justice Kagan, CIC Services, LLC v. Internal Revenue Service et al, the Supreme Court held that certain taxpayers and their advisors may sue the IRS to set aside or invalidate illegally issued IRS regulations and notices, at least when the legality of the regulation or notice, rather than taxes, is the only issue in dispute. The case involved a notice issued by the IRS in November 2016 requiring all every taxpayer and their material advisors who engaged in certain captive insurance transactions to make certain informational disclosures to the IRS and maintain certain additional books and records concerning the transactions. Noncompliance could result in onerous fines and imprisonment up to one year. CIC Services LLC contended that the notice was issued illegally, pointing out among other things that the agency issued the notice without first allowing for public comments as required by the Administrative Procedure Act (APA). The IRS contended that it was immune from the lawsuit due to the Anti-Injunction Act (AIA), a Civil War era law that requires taxpayers to first pay any disputed tax before suing the IRS. In a unanimous opinion authored by Justice Elena Kagan, the Supreme Court held that such lawsuits against the IRS can proceed despite the provisions of the AIA when the lawsuit isn’t a dispute over taxes but instead merely contests the legality of the IRS’s rule making. “For too long the IRS has behaved as if it was exempt from the basic rules of lawmaking that govern federal administrative agencies, as if the AIA gave it carte blanche to make and enforce laws by fiat without following due process,” said Sean King, General Counsel for CIC Services. “Our 9-0 victory proved them wrong.” After the ruling by the Supreme Court, the case was remanded back to Federal District Court. That court has since issued an injunction forbidding the IRS from enforcing Notice 2016-66 against CIC Services pending ultimate resolution of its case. The court noted that the injunction against the IRS was justified in part because CIC Services is suffering irreparable harm by virtue of the Notice and is likely to win its case on the merits. A decision on the merits is expected any day. In the meantime CIC Services expects other material advisors, and perhaps even taxpayers, to petition other courts for similar relief from the notice.
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