Key Takeaways
- The pending case, Silver v. Internal Revenue
Service,1 will provide insight, when decided, of
the view of the Court of Appeals for the District of Columbia
Circuit on the scope of judicial review of administrative
regulations that apply to small business. - Small businesses should be vigilant in demanding that
administrative agencies observe the requirements of the Regulatory
Flexibility Act (“RFA”).2
Introduction: The Treasury Department is using
arguments based on standing – Constitutional Article III
standing3 and statutory standing4 – to
persuade the D.C. Circuit that it should not decide the merits of
Monte Silver’s challenge to the validity of a federal income
tax regulation (“Transition Tax Regulation” or
“Regulation”) interpreting the transition tax. The
transition tax, enacted in 2017, generally requires U.S.
shareholders who control foreign corporations to include in their
2017 tax returns the accumulated earnings of their foreign
corporations.5 Treasury’s argument is that neither
Silver, a United States citizen, nor his Israeli corporation
through which he practices United States tax law in Israel, has
Article III standing to bring the action. Moreover, Treasury argues
that even if Silver has Article III standing, he does not have
statutory standing under the RFA to compel Treasury to consider the
validity of the Regulation.
Article III Standing: A plaintiff who brings an
action in federal court must have standing under Article III of the
Constitution, which has three elements: (i) the plaintiff must have
suffered an injury in fact that is concrete, particularized,
actual, and imminent; (ii) the injury must be fairly traceable to
the conduct complained of; and (iii) it must be likely that the
injury will be redressed by a favorable decision.6 When
the plaintiff alleges a violation of a procedural right,
as is Silver’s case, the plaintiff must show that (i) its right
was violated and that the violation invaded its own particularized
interest, and (ii) a favorable decision could –
rather than would – better redress plaintiff’s
interests.7
Statutory Standing under the Regulatory Flexibility Act
(“RFA”): A federal administrative agency,
including Treasury, must prepare a regulatory flexibility analysis
when it publishes a notice of proposed rulemaking. The analysis
must describe the impact on small business8 and permit
public comment.9 When the agency finalizes the rule, it
must, among other findings, evaluate and discuss the public
comments of small businesses.10 An agency may, however,
avoid addressing small business concerns by publishing a
certification that the rule will not have a significant economic
effect on a substantial number of small entities.11 The
certification must be published at the same time as the notice of
proposed rulemaking and contain the factual basis for the
certification. A small entity that is adversely affected by a rule
may obtain judicial review.12 The court may order the
agency to take corrective action including remanding the rule to
the agency and deferring enforcement of the rule against small
entities.13 The scope of judicial review is limited by
any other statute that forbids the relief sought.14
The Parties’ Arguments: Treasury certified
that the Transition Tax Regulation did not have a significant
economic effect on a substantial number of small businesses, and
for that reason, the RFA did not require Treasury to determine the
impact on small business.15 (A 2016 General
Accountability Office report found that Treasury did not perform a
regulatory flexibility analysis on 99.5 % of the regulations
published between 2013 and 2015.) Silver argues that Treasury
violated the RFA by publishing the Regulation without determining
the tax compliance burden that befalls small business. He seeks
relief, not from the tax, but from the complexities of compliance.
He asks the Court of Appeals to reject Treasury’s finding that
the Regulation does not adversely affect small business, invalidate
Treasury’s certification to that effect, and defer enforcement
of the Regulation until Treasury addresses small business concerns
as required by the RFA. The federal district court below found that
Silver did not have constitutional standing to challenge the
validity of the Regulation.
Treasury views the case as one in which Silver seeks equitable
relief by asking Treasury to change future tax reporting
relating to the transition tax.16 If the relief sought
is characterized as equitable, Silver might be stymied by the
Anti-Injunction Act,17 which provides that a federal
court does not have jurisdiction to enjoin the assessment or
collection of a federal tax. Silver’s response is that he is
not asking for an injunction and that the relief he requests is not
equitable. He asks only that Treasury be ordered to perform a
regulatory flexibility analysis as required by the RFA and consider
whether alternative means to ease administrative compliance costs
for the transition tax for small business can be formulated and
promulgated.
Silver relies on the recent Supreme Court case, C.I.C.
Services, LLC, v. Internal Revenue Service,18 for
the proposition that an action to enjoin a tax reporting
requirement is not an action to enjoin an assessment or collection
of a federal tax. The case is not on all fours with Silver’s
case, but it may be close enough for the Court of Appeals to decide
that Silver should get the remand to Treasury he requests. The
Court of Appeals disposition of Silver’s case should be watched
because agency use of the Anti-Injunction Act to avoid regulatory
flexibility analyses when tax regulations are involved could
severely limit protection that the RFA provides to small
business.
Silver argues that as part of the RFA process, the public must
be given the opportunity to comment on how Treasury can ease tax
reporting requirements for small businesses. Perhaps the public, if
not Treasury, can propose a realistic method to adequately account
for the transition tax and its repercussions. Treasury has eased
tax accounting burdens for other tax provisions.19
Perhaps Treasury, aided by public comments, can do so for the
transition tax for small business.
On the question of redressability, the third element of Article
III standing, Treasury argues that Silver has already performed the
tax compliance work for the transition tax and reported the tax in
his 2017 income tax return, with the result that retroactive relief
is not possible. The cost expended by Silver to comply simply is
not recoverable by ordering Treasury to perform a regulatory
flexibility analysis. Moreover, Treasury argues that prospective
injury is not redressable because it is too speculative. Silver
will have a tax compliance burden only if he causes his foreign
corporation to distribute a dividend to him. He has never caused
his foreign corporation to distribute a dividend and may never do
so.
Silver treats the discussion of prospective injury as a red
herring. The RFA does not require proof of imminent prospective
injury. The RFA requires only that Treasury analyze the effect of
the Transition Tax Regulation on small business. Nonetheless,
Silver offered evidence during the trial court summary judgment
proceeding that he intends to have his foreign corporation
distribute a dividend, but the trial court ruled that the proffered
evidence was untimely and did not consider it.
Of interest is whether the Court of Appeals will take a narrow
or expansive view of the effect of the Transition Tax Regulation. A
narrow view would find that the complex accounting burden about
which Silver complains did not result from the Regulation itself,
but from collateral effects. An expansive view would consider all
the tax accounting ramifications and repercussions of the
Regulation and recognize that Congress, through the RFA, directs
administrative agencies to consider administrative relief for small
business when agency action economically aggrieves them. The trial
court described the transition tax as “complicated, to say the
least,” and Silver’s explanation of the tax accounting
required for a dividend distribution from the foreign corporation
“impenetrable.” Perhaps these are circumstances when
administrative relief for small business from the record-keeping
and the information reporting is appropriate.
Statutory Standing: The Department of Justice
argues that even if Silver has Article III standing, he does not
have statutory standing because he is not within the sphere of
plaintiffs that the RFA protects. The RFA gives statutory standing
to a “small entity,” which includes a small business
concern that is independently owned and operated, and not dominant
in the field.20
Silver argues that he is imbued with the characteristics of a
domestic corporation because he has elected to treat the amount
that is included in his income by virtue of the transition tax as
if received by a domestic corporation.21 The Justice
Department responds that the proper focus is on Silver, who is an
individual and not an entity. Only “entities” are
protected by the RFA. Silver, as an individual, might, of course,
be a “small business concern” and within the protected
sphere. It would be surprising if Congress did not intend RFA
protection for individuals operating as sole proprietors who are
unreasonably burdened by federal tax compliance requirements.
Perhaps of greater concern for Silver is whether Silver, having
elected to be treated as a domestic corporation, has a
“business.” The business activity is conducted through
his foreign corporation. The transition tax burdens him as the
corporate shareholder to account for it. Treasury contends
Silver’s law practice business is conducted in corporate form,
is separate from the compliance burden, and Silver, as an
individual, does not conduct the business. Silver argues he has the
compliance burden to report income from the foreign corporation,
including future dividend distributions, and the RFA compels
Treasury to address the burden.
Footnotes
1. 531 F.Supp.3d 346 (2021) appeal pending, No.
21-5116 (D.C. D. May 25, 2021).
2. 5 U.S.C. §§601-612.
3. U.S. Const. Art. III, §2, cl. 1.
4. Regulatory Flexibility Act, 5 U.S.C.
§611(a)(1).
5. I.R.C. §965(a)(1).
6. Lujan v. Defenders of Wildlife, 504 U.S. 555,
560–61 (U.S.1992).
7. Office v. Fed. Energy Reg. Comm’n, 949
F.3d 8, 13 (D.C. Cir. 2020.
8. 15 U.S.C. §632. A small business is independently
owned, not dominant in its field, satisfies other definitions and
standards promulgated by the Small Business
Administrator.
9. 5 U.S.C. §603.
10. 5 U.S.C. §604.
11. Id.
12. 5 U.S.C. §611(a)(4).
13. Id.
14. 5 U.S.C. §702.
15. Treas. Dec. 9846 (Feb. 4, 2019).
16. Appellee-Internal Revenue Service “Final
Brief” (D.C.D. June 13, 2022).
17. I.R.C. §7421(a).
18. 141 S.Ct. 1582 (2021).
19. An example is Treas. Reg. §1.263(a)-1 et seq.,
which relieves a taxpayer of what otherwise would be an
excruciating tax accounting burden by permitting the taxpayer to
deduct the cost of property that otherwise might require
capitalization pursuant to the literal terms of IRC
§263(a).
20. 5 U.S.C. §§601(3), -(6), 611(a)(1), 15
U.S.C. 632(a)(1).
21. I.R.C. 962(a). Silver elected to be treated as a
domestic corporation to offset the income on which the transition
tax is based with credits for foreign taxes paid on that income. As
an individual, he could not claim these “indirect”
foreign tax credits.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.