Tax Notes covers oral hearings on our motion for judgment in Transition tax case
A court is homing in on what is a sufficient compliance burden under transition tax regs as the government seeks to beat back a suit challenging the rules’ validity for purported Regulatory Flexibility Act (RFA) violations.
The U.S. District Court for the District of Columbia held a hearing on March 15 in Silver v. IRS in response to cross-motions for summary judgment in Monte Silver’s section 965 suit. A major focus of Judge Amit P. Mehta, and a significant point of contention between the government and the plaintiff, was what future burden Silver would suffer from the transition tax and what role section 962 played in establishing that burden. The government has asserted that Silver does not face a future compliance burden under section 965 because he does not owe the tax and his focus on section 962 is an attempt to obfuscate any challenges he faces under the former provision.
At the hearing, Silver’s attorney, Lawrence Marc Zell of Zell, Aron & Co., asserted that the transition tax “resurrected” the previously dormant section 962. That provision suddenly became relevant because an election under it allowed Silver to use foreign tax credits to reduce the transition tax, Zell argued.
Section 962 provides an election to allow individuals to be subject to tax at corporate rates. Silver has argued that the election renders the individual subject to several complex rules on dividends, including those related to FTC accounting, allocations between tainted dividends, a bilateral tax treaty, and qualified/nonqualified dividends.
But Nishant Kumar of the Justice Department Tax Division argued at the hearing that the harm Silver alleged involving continued reporting requirements is “completely untethered from [the] supposed RFA violation under section 965.”
There’s "no scope for the agency to simplify the decades-old [section] 962 law and its regulation,” Kumar said, noting that section 962 also mentions sections 959 and 951. “[Plaintiffs] could keep laying planks down throughout the Internal Revenue Code.”
Opening Pandora’s Box
Silver has sued the IRS under the legal theory that the agency, when drafting the provisions' regulations, violated administrative law protections laid out for small businesses under the RFA and the Paperwork Reduction Act.
The RFA requires a federal agency to perform an initial and final regulatory flexibility analysis when issuing proposed and final regs. The final analysis 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 — one that the transition tax regs employ — if the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities, which requires a statement providing the factual basis for the certification.
The government suffered a setback in December 2019 in the suit after Silver prevailed against a government motion to dismiss. But that hasn't stopped the Justice Department from continuing to assert that Silver lacks standing in his suit.
Mehta queried whether any reporting required because of the section 962 election became relevant because the election was made in accordance with section 965 in “sort of a 'but for' relationship.” He asked whether the IRS could have recognized that many small entities would make a section 962 election, creating future compliance costs that the agency could have alleviated through such means as a reduction in paperwork requirements.
Besides asserting that the section 962 burden was too attenuated to the transition tax, Kumar argued that it was difficult to envision what Silver’s section 962 burden would be because he was using the election to zero out his transition tax liability.
Zell pointed to section 962(d), which provides that when an actual distribution is made, the earnings and profits from a controlled foreign corporation that exceed the tax applicable under the section 962 election are also treated as income.
Kumar responded that Silver, who previously alleged a general ongoing reporting burden, shifted to discussing section 962 burdens in his reply brief and “opened up this entire Pandora’s box.”
Another focal point of the oral argument was whether Silver’s company, Monte Silver Ltd., was an entity subject to the transition tax regulations.
Zell asserted that while the company was not subject to the tax directly — that Silver was as the shareholder — the liability could not be calculated without the entity. The information that the IRS requires is coming from Silver Ltd., he argued. Calling it a “package deal” that was two sides of the same coin, Zell said the transition tax could not be imposed without considering both the entity and the U.S. shareholder.
Kumar countered that the analysis required under the RFA applied only to directly regulated entities, citing several court decisions for support, including Motor & Equip. Mfrs. Association v. Nichols, 142 F.3d 449 (D.C. Cir. 1998). Those decisions recognized that a nonregulated entity may still bear the economic cost of a regulation, he added. Silver has also sued the government for its global intangible low-taxed income regs under a legal theory like the one laid out in his transition tax suit. That suit is stayed pending a jurisdictional resolution in the transition tax challenge.
The transition tax case is Silver v. IRS, No. 1:19-cv-247.