Calculating Transition Tax Doesn’t Give Suit Standing, DOJ Claims In Reply Brief

Monte Silver
By Monte Silver

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As litigation over the validity of the transition tax regs advances, the Justice Department is continuing to fight the taxpayer’s attempt to establish standing through incurred compliance costs.

In its August 1 reply in support of the motion to dismiss for lack of jurisdiction, the Justice Department asserts that Monte Silver’s claim that the section 965 regs are complex and necessitate paying for professional tax services is not sufficient injury.

“Allowing Plaintiffs to proceed on such a broad proposition would give nearly anyone the ability to challenge nearly any tax law in court, without following the refund or deficiency procedures established by Congress for this purpose,” the brief states. “Any person . . . that is potentially subject to U.S. tax will inevitably have to spend time familiarizing itself with the requirements of federal tax law. If merely spending money to determine one’s obligations under a law were sufficient to confer standing, Article III’s requirement of concrete injury would have little meaning.”

The government argues in its reply that cases cited by Silver to support standing were inapposite, including lumber companies sustaining economic injury from a loss of supply from an Environmental Protection Agency habitat designation, a medical manufacturer required to upgrade a chemical, and farm trading associations challenging the costs imposed by water pollution regs.

In January the plaintiffs — an Israeli corporation and Silver, a U.S. citizen who is an Israeli resident and sole shareholder of the corporation — filed suit against the IRS and Treasury in the U.S. District Court for the District of Columbia challenging the validity of the section 965 regs under the Regulatory Flexibility Act (RFA) and the Administrative Procedure Act. The challenge asserts that Treasury “issued impenetrable regulations . . . that impose many unreasonably complicated burdens upon a vast number of small businesses and small business owners.”

Briefs have been filed by both sides over whether the suit should be dismissed based on standing and the proposition that the Anti-Injunction Act (AIA) is a bar to relief. Silver has argued that small entities have incurred injuries through the compliance costs from the section 965 regs “directly traceable to the failure of Defendants to consider accommodations for protecting small business.”

But the reply brief argues that the taxpayers’ “real quarrel” is with the statute itself, which cannot be challenged under the Administrative Procedure Act and the RFA. Without the regs, section 965 compliance would be more difficult, it says.

“Plaintiffs try to mask their request for a statutory-exemption as a ‘simple specific proposal’ for modifying the proposed regulations, and one that Treasury failed to adequately consider. But this rhetorical trick cannot establish standing,” the brief states, while acknowledging that the RFA requires an agency to consider rule alternatives, including potentially an exemption. “Nonetheless, the authority to grant ‘an exemption from coverage of the rule’ does not allow the agency to altogether excuse a taxpayer from the statute.”

Florida Bankers Revisited

The plaintiffs have argued that they owe no transition tax and are not subject to audit. But the reply brief asserts that the ability to sue through a deficiency or refund proceeding is not speculative and the AIA thus bars the suit.

Under the AIA, suits that would restrain the assessment or collection of tax are disallowed.

The government argues that the taxpayers’ attempts to distinguish Florida Bankers Association v. U.S. Department of Treasury, 799 F.3d 1065 (D.C. Cir. 2015), were improper. In that case, the D.C. Circuit held that the AIA barred a regulatory challenge requiring U.S. banks to report interest earned by nonresident alien individuals or be subject to a penalty.

“Like the Plaintiffs here, the plaintiffs in Florida Bankers did not yet owe the liability at issue. Indeed, the Florida Bankers plaintiffs never would owe the penalty at issue in that case, so long as they complied with the reporting requirements they wished to challenge,” the brief states. “Plaintiffs cannot escape the mandate of the Anti-Injunction Act when they have an available remedy, even though they must wait until they owe a transition tax under section 965 to challenge the regulations.”

Further, the brief asserts that the RFA and AIA do not interfere with each other and that the RFA “expressly defers to other statutory schemes to determine the form and manner of review.” The brief points out that Florida Bankers also included an RFA claim.

In Silver v. IRS, No. 19-cv-247 (D.D.C. 2019), the Justice Department is represented by Joseph A. Sergi, Laura M. Conner, and Nishant Kumar.