One sponsor of this type of transaction of interest sued to have the Notice declared invalid. CIC Services LLC v. IRS, No. 3:17-cv-00110 (E.D. Tenn. 2017). It claimed that the Notice was a legislative rule issued without notice and comment as required by the Administrative Procedure Act.
The IRS moved to dismiss, claiming that the suit was barred by the Anti-Injunction Act and the Declaratory Judgment Act, both of which preclude suits to prevent the assessment of tax. Failure to comply with the Notice could subject the plaintiff to a penalty, which the Code defines as a tax. Although the plaintiff complied with the Notice and could not be subject to the penalty, the court ruled that the suit still sought to prevent the assessment of tax from someone, and dismissed the action.
The plaintiffs appealed. Before the appeal was decided, on March 12, 2019, the plaintiffs wrote to the appellate court to make an additional argument based on a Policy Statement on the Tax Regulatory Process, which the Treasury issued on March 5. It states that subregulatory guidance does not have the “force and effect of law.”
The letter asserts that means that the Notice, which is subregulatory guidance by definition since it was not issued as a regulation, does not have any effect and cannot be enforced by a penalty/tax and should be enjoined as a mandatory directive. The letter states: “This eviscerates the premise of Appellees’ argument that the Anti-Injunction Act prevents this Court from enjoining Notice 2016-66. If Notice 2016-66 is not a law, enjoining it cannot restrain the assessment and collection of lawful taxes.”
Whether the letter succeeds or not, it nicely illustrates the predicament the Treasury has gotten into by using the term “force and effect of law,” which has no clear meaning, and admitting that subregulatory guidance does not have it. Expect to see many, many more litigations like this one.
For more information, please contact Jack Cummings at 919.862.2302.