A taxpayer has delivered on his promised suit against the global intangible low-taxed income regulations, alleging that they violate administrative law protections for small businesses. For over a year, Monte Silver, a U.S. citizen living in Israel, vowed that he would bring suit against the GILTI regs for violating the Regulatory Flexibility Act (RFA) and Paperwork Reduction Act (PRA), two statutory provisions that until recently were relatively obscure. His complaint was filed June 12 in the U.S. District Court for the District of Columbia (Silver v. IRS, No. 20-cv-01544).
In the complaint, Silver asks that the October 2018 proposed GILTI regs (REG-104390-18) and June 2019 final GILTI regs (T.D. 9866) be remanded to the IRS to comply with the RFA and PRA. He also asks that enforcement of the final rules be deferred against small entities until the court determines that the IRS has complied with the procedures laid out in the RFA, PRA, and the Administrative Procedure Act (APA).
The complaint seeks IRS compliance with section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, which requires agencies to publish compliance guides to assist small entities with their rules.
Silver alleges that once he learned that small businesses would be subject to GILTI, he began contacting IRS and Treasury officials in March 2018, asking for relief. However, the IRS didn’t believe that being subject to GILTI violated the RFA, PRA, and APA, the complaint alleges.
Lawrence Marc Zell of Zell & Associates International Advocates LLC, representing Silver and Monte Silver Ltd., the Israeli legal services corporation of which Silver is the sole shareholder, said that his client was “standing up for the rights of U.S.-owned small businesses around the world.”
“When the IRS proposed and then issued final GILTI regulations last year, they failed to take into account the impact of these extremely complex rules and requirements on small business, which they were required to do under U.S. law. This callous approach to small business is unfair and unnecessary,” Zell said. “Monte Silver’s lawsuit is aimed at correcting this gross injustice by compelling the IRS and the Department of the Treasury to meet their duty to minimize the impact of regulations intended for large corporations upon small businesses at home and abroad.
The PRA’s purpose is to minimize the paperwork burden for some entities, including small businesses.
Under the RFA, enacted in 1980, an agency is required to perform an initial and final regulatory flexibility analysis when issuing proposed and final regs. The final analysis, under 5 U.S.C. section 604, must include a statement on the significant issues raised by public comments, a description of the number of small entities to which the rule will apply and the projected reporting and compliance requirements for those entities, and a description of the steps the agency has taken to minimize the economic impact on small entities
.There is an exception to the analysis if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. That exception requires a statement providing the factual basis for the certification. Both the proposed and final GILTI regs contain such a certification for the RFA.
Challenges under the RFA and PRA can be reviewed by a court under the APA, which allows courts to set aside agency rules that are “arbitrary, capricious, [or] an abuse of discretion.”The complaint attacks the GILTI regs for being “impenetrable and esoteric” and having “a catastrophic effect” on small businesses.
“Had defendants [taken] their administrative duties seriously and actually researched and analyzed the empirical data, they could not have issued the certifications that they, in fact, did. Moreover, had defendants done their homework as required under the RFA and PRA, they would have considered the needs and concerns of small business like plaintiffs, and they would have crafted realistic regulations, comprehensible to the average small business owner or manager,” the complaint states.
Silver is also the plaintiff in a similar suit against the section 965 transition tax imposed on accumulated offshore earnings. In May he moved for summary judgment in that case after surprising the tax world when he successfully fended off the government’s motion to dismiss.
Individual U.S. shareholders are subject to GILTI rates of up to 37 percent, whereas large multinationals are only subject to tax of up to 21 percent in a worst-case scenario, the complaint argues.
Silver told Tax Notes that GILTI’s burden on small businesses is even heavier than that imposed by the transition tax.GILTI is perhaps the most far-reaching of the Tax Cuts and Jobs Act’s international tax provisions, along with one of its most complex. Under section 951A, each U.S. shareholder of a controlled foreign corporation is subject to tax on GILTI, defined as the excess of its pro rata share of tested CFC income over a 10 percent return (reduced by some interest expense incurred by CFCs) on its pro rata share of the depreciable tangible property of each CFC (qualified business asset investment).
“Small businesses are treated much worse than Google and Apple in almost all cases — both in terms of tax liability and tax rates. Combine that with the fact that the tax is annual, and that the CPAs of small businesses cannot begin to understand the law or the final regulations, and the picture that emerges is pretty dire,” Silver said.
The complaint argues that individual U.S. shareholders are subject to GILTI rates of up to 37 percent, whereas large multinationals are only subject to tax of up to 21 percent in a worst-case scenario.“Beyond the sheer insanity of the above results, the vast majority of U.S. tax professionals advising these small businesses (often one-person entities themselves) had, and still have, no idea how to comply with GILTI or the final regulations. Plaintiffs and similarly placed people and entities have the following options: (i) noncompliance, (ii) have their tax professionals operate on a ‘best-guess’ basis, or (iii) engage large tax firms at exorbitant compliance costs,” the complaint states.
GAO Report Support
Silver said the GILTI regs served as another example of Treasury and the IRS ignoring their RFA and PRA obligations, citing a 2016 report by the Government Accountability Office.That report found that the IRS avoided the RFA in 99.5 percent of its cases. The report reviewed more than 200 regs from 2013 through 2015 and found that in nearly all of them, the IRS and Treasury stated in the preamble that either the RFA did not apply because the guidance didn’t impose a collection of information requirement on small entities or that a regulatory impact analysis wasn’t required because the rules would not have a significant economic impact on a substantial number of small entities.
Silver appears to be the first taxpayer to file suit against the GILTI regs on the RFA-PRA violation theory. He said he was disappointed and surprised that no other trade association had decided to take similar legal action.“It appears that in D.C., money talks, and big money and big business rule the process. The purpose of the RFA was specifically to have the views and interests of smaller businesses in the regulatory process,” Silver said. “For some reason, the associations are not stepping up to the bat. This creates an opportunity for those who are interested in addressing this vacuum.”