WASHINGTON—Supreme Court justices sharply questioned arguments by the federal government that certain tax regulations can’t be challenged in court before they are enforced.
Justices across the ideological spectrum, including Samuel Alito, Stephen Breyer, Elena Kagan and Neil Gorsuch, expressed skepticism about the government’s position during an hour-long oral argument Tuesday. A ruling against the government would make it harder for the Internal Revenue Service to demand and collect information that it uses to police tax shelters and could invite more-frequent legal challenges.
The case involves a requirement that taxpayers and their advisers disclose certain questionable transactions when they file their returns. They face tax penalties if they don’t comply. That disclosure effectively attaches a red flag to those tax returns, letting the IRS more easily identify which ones to audit.
The disclosure requirement drew a challenge from CIC Services LLC, which helps companies create what are known as captive insurers, subsidiaries that can get favorable tax treatment. For several years, the IRS has been questioning many captive-insurance arrangements, warning that they can be abusive tax shelters if they move money to a tax-favored entity without insuring genuine risks. In 2016, the agency issued a notice requiring disclosure of certain captive-insurance transactions.
The court isn’t considering the merits of captive insurance but is instead examining the ways taxpayers can fight the IRS in court.
