Tax360 on our Transition Tax lawsuit
The Internal Revenue Service must stop enforcing a tax on overseas profits because the agency wrongly concluded that the burden of calculating the tax would not hurt small businesses, an expatriate attorney told a federal court Friday.
Small firms struggle to understand the so-called transition tax, a provision of the 2017 federal tax overhaul, because of the "utter impenetrability of the 248-page regulations" that enact it, the attorney, Monte Silver, said in a motion to the court. Silver, who operates a law practice in Israel organized as a corporation for U.S. tax law purposes, maintains that the regulation harmed him by forcing him to undergo calculation costs of understanding the law.
There is notax liabilityat issue in the case, but the attorney argues the Internal Revenue Service violated the 1980 Regulatory Flexibility Act , which requires an analysis of any alternatives or exemptions the regulations could use to reduce burdens on small businesses.
"There is not an iota of evidence in the administrative record, not a single document or email, which supports the certification that the rule would not, if promulgated, have a significant economic impact on a substantial number of small entities," Silver said.
The court must defer enforcement of the rule until the IRS considers its impact on small firms as required by the RFA and makes changes to bring the regulations into compliance, he said.
The so-called transition tax, established as part of Internal Revenue Code Section 965 by the 2017 Tax Cuts and Jobs Act , changed the IRC so that overseas profits are taxed when made instead of repatriated to the U.S. The IRS said an RFA analysis was not required because the regulations would not have a significant economic impact on many small entities.
But the agency ignored almost 100 small businesses' submitted public comments that compliance would be a significant burden, Silver said. Despite a background in law and accounting, Silver said he spent hours and a lot of money trying to understand the intricacies of the regulations.
About 250,000 small businesses and approximately one million Americans living outside the U.S. are affected by the law, he added.
The 1996 Small Business Regulatory Enforcement Fairness Act authorized judges to review and verify that an agency analyzed the small-business impact of a proposed rule, Silver said. If the court finds that the agency violated the RFA, it can order the rule remanded and its enforcement deferred, he said.
Other federal regulations empower courts to ensure agencies follow administrative procedures when promulgating new rules, Silver said.
ThePaperwork Reduction Act requires rules to be written in simplified language and to reduce compliance burdens on small businesses, he said. The Administrative Procedure Act allows courts to set aside rules that are enacted without following rulemaking guidelines, he said.
Silver also requested attorney fees and costs from the IRS.
The IRS has argued that Silver must wait until the agency has assessed the transition tax against him. Otherwise, he hasn't suffered a harm that the courts can remedy, it said. Silver's lawsuit is also prohibited by the Anti-Injunction Act because it would interfere with the collection of taxes, the U.S. has said.
The Center for Taxpayer Rights filed a motion with the court this month seeking permission to submit an amicus brief. The center stated in its motion that the regulations are burdensome and that they disproportionately affect low-income small-business owners.
"The center and its counsel believe that they can be of assistance to this court in the instant case by illustrating the potential harm that the government's position could have on low-income taxpayers in the sharing economy who might otherwise be overlooked," its brief said.
Silver told Law360 he expects the court to grant his request.
"The government did not have one single email or document to support their certification," he said. "Quite the opposite. There is overwhelming evidence to the contrary."
Legal representatives of the IRS did not respond to requests for comment.
Legal representatives of the Center for Taxpayer Rights could not be reached for comment.
Silver is represented by Lawrence Marc Zell of Zell Aron & Co.
The U.S. government is represented by Nishant Kumar and Joseph A. Sergi of the U.S. Department of Justice, Tax Division.
The Center for Taxpayer Rights is represented by Dana Montalto of the Legal Services Center of Harvard Law School.