Despite encouraging signs from the U.S. Supreme Court in a remanded federal case over tax penalty exams, clients shouldn’t expect the IRS to cede its stance that microcaptive insurance arrangements must be reported, a practitioner told an American Bar Association tax conference February 1.
In May 2021, the high court ruled unanimously in CIC Services, LLC (S Ct 5/17/2021) 127 AFTR 2d ¶2021-703 that the taxpayer was entitled to resume its challenge against IRS guidance—in Notice 2016-66—that transactions involving microcaptive insurers must be disclosed under threat of penalty. According to the justices, challenges such as CIC Services’s don’t necessarily implicate the Anti-Injunction Act, which bars lawsuits that could impede tax collection. For details, see Supreme Court allows challenge to material advisor reporting requirements.
CIC Services, whose case is back in the federal trial court for the Eastern District of Tennessee’s northern division, had sued the IRS under the Administrative Procedures Act (APA). The Supreme Court’s apparent decoupling of the two statutes has prompted tax observers to predict a wave of similar APA-driven challenges.
But Mary E. Wood, a partner with Dallas law firm Meadows, Collier, Reed, Cousins, Crouch & Ungerman LLP, said that despite the CIC Services ruling, she is advising clients to proceed as though no major shift in IRS policy is coming.
“We still don’t have really any definitive precedent,” Wood said on a panel at the ABA tax section’s virtual midyear meeting. “What we have told clients is we don’t expect that to change the position” of the IRS’s examinations office, “at least not at this juncture.”
Wood added: “I don’t think that there’s anything wrong with us raising those arguments in Exam and essentially asserting the same arguments that are being asserted in Mann Construction or CIC, depending on the notice and if you’re a material adviser or a taxpayer. But I think we can preserve our arguments there and just get them on the record, understanding that we don’t think the IRS will be receptive to those arguments.”
At a December 9 hearing in Mann Construction’s challenge before the Sixth U.S. Circuit Court of Appeals, Judge Jeffrey S. Sutton questioned the IRS’s authority to issue Notice 2007-83, which offers guidance that disclosure of trust arrangements is required, without having solicited public comments beforehand. The judge said the IRS stated exemption from administrative law under the APA was far from clear. For details of the case, see Notice identifying “listed transactions” isn’t subject to APA notice-and-comment rules.
In such cases, the lawyer explained, clients should make “a strategic decision on how to move forward” until the legal landscape has had time to settle, “hopefully in favor of taxpayers and material advisers, and perhaps getting notices set aside.” In the meantime, IRS appeals officials are unlikely to consider any appeal akin to those of CIC Services or Mann Construction Inc. as a an impetus to settle those cases, Wood said.
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