Silver v. Internal Revenue Serv.

• Decision Date: 28 March 2021
• Docket Number: Civil No. 19-cv-247 (APM)
• Citation: 531 F.Supp.3d 346
• Parties: Monte SILVER, et al., Plaintiffs, v. INTERNAL REVENUE SERVICE, et al., Defendants.
• Court: U.S. District Court — District of Columbia

531 F.Supp.3d 346

Monte SILVER, et al., Plaintiffs,

v.INTERNAL REVENUE SERVICE, et al., Defendants.

Civil No. 19-cv-247 (APM)

United States District Court, District of Columbia.

Signed March 28, 2021

Lawrence Marc Zell, Zell, Aron & Co., Israel, for Plaintiffs Monte Silver, Monte Silver, Ltd.

Joseph A. Sergi, Nishant Kumar, U.S. Department of Justice, Tax Division, Washington, DC, for Defendants.

MEMORANDUM OPINION

Amit P. Mehta, United States District Court Judge

I. INTRODUCTION

As part of the Tax Cut and Jobs Act of 2017, Congress amended Internal Revenue Code ("IRC") section 965 to impose a one-time "transition tax" on U.S. shareholders of certain specified foreign corporations based on the earnings accumulated by those entities since 1986. This case involves a challenge to the procedures by which Defendants Internal Revenue Service ("IRS") and the U.S. Department of Treasury ("Treasury") promulgated the regulations implementing section 965. Plaintiffs Monte Silver and his business Monte Silver, Limited, a company based in Israel, claim to be small entities unduly burdened by the final regulations. They bring this action to challenge Defendants’ alleged failure to assess the economic impact the regulation would have on small businesses, as required by the Regulatory Flexibility Act ("RFA"), 5 U.S.C. §§ 601 – 612.

Now pending before the court are the parties’ cross-motions for summary judgment. After a thorough review of the parties’ submissions and applicable case law and statutory authority, the court finds that Plaintiffs lack constitutional standing to pursue their claims. And even if Plaintiffs had standing, neither Plaintiff has a cause of action under the RFA. Accordingly, for the reasons discussed in greater detail below, the court grants Defendants’ cross-motion for summary judgment.

II. BACKGROUND

A. Statutory and Regulatory Framework

1. The Regulatory Flexibility Act

Enacted in 1980, the RFA is a "[p]urely procedural" statute that "obliges federal agencies to assess the impact of their regulations on small businesses." U.S. Cellular Corp. v. FCC , 254 F.3d 78, 88 (D.C. Cir. 2001). It "arose from the concern that small businesses may be forced to bear an unnecessary or disproportionate burden when the federal government issues regulations." Nat'l Ass'n for Home Care v. Shalala , 135 F. Supp. 2d 161, 163 (D.D.C. 2001). See generally Doris S. Freedman et al., The Regulatory Flexibility Act: Orienting Federal Regulation to Small Business , 93 Dick. L. Rev. 439, 440 (1989) ; Paul R. Verkuil, A Critical Guide to the Regulatory Flexibility Act , 1982 Duke L.J. 213, 215–26 (1982).

The RFA " ‘does not alter the substantive mission of the agencies under their own statutes.’ " N.C. Fisheries Ass'n, Inc. v. Gutierrez , 518 F. Supp. 2d 62, 72 (D.D.C. 2007) (quoting Little Bay Lobster Co. v. Evans , 352 F.3d 462, 470 (1st Cir. 2003) ); see also 5 U.S.C. § 606 ("The requirements of [ 5 U.S.C. §§ 603 – 604 ] do not alter in any manner standards otherwise applicable by law to agency actions."). Rather, the Act "is a procedural statute setting out precise, specific steps the agency must take[,]" Aeronautical Repair Station Ass'n, Inc. v. FAA , 494 F.3d 161, 178 (D.C. Cir. 2007), to "ensur[e] that agency rules ... tak[e] into account the size and nature of the regulated businesses," Mid-Tex Elec. Coop., Inc. v. FERC , 773 F.2d 327, 342 (D.C. Cir. 1985) (citing S. Rep. No. 878, 96th Cong., 2d Sess. 3, reprinted in 1980 U.S.C.C. A.N. 2788, 2790). Specifically, the RFA provides that whenever an agency is required to publish a notice of proposed rulemaking, it must first determine whether the regulation under consideration would "have a significant economic impact on a substantial number of small entities." 5 U.S.C. § 605(b). "Only if the proposed regulation would have such an impact do the statute's two primary procedural obligations attach." N.C. Fisheries Ass'n, Inc. , 518 F. Supp. 2d at 73. "Those obligations are the preparation first of an initial and then of a final regulatory flexibility analysis, commonly referred to as an IRFA and a FRFA." Id. (citing 5 U.S.C. §§ 603 – 604 ); see Nat'l Ass'n for Home Care , 135 F. Supp. 2d at 163. Sections 603 and 604 set forth the explanations and considerations that IRFAs and FRFAs, respectively, "shall contain." 5 U.S.C. §§ 603(b), 604(a). Both forms of analysis generally "describe[ ] the effect of the proposed rule on small businesses and discuss[ ] alternatives that might minimize adverse economic consequences." Nat'l Women, Infants, & Child. Grocers Ass'n v. Food & Nutrition Serv., 416 F. Supp. 2d 92, 108 (D.D.C. 2006). The FRFA, specifically, must provide, among other components, "a description of the steps the agency has taken to minimize the significant economic impact on small entities," including "a statement of the factual, policy, and legal reasons for selecting the alternative adopted in the final rule and why each one of the other significant alternatives to the rule considered by the agency ... was rejected." 5 U.S.C. § 604(a)(6). But, as is relevant to this case, the agency does not need to prepare a FRFA if the head of the agency certifies that the rule "will not ... have a significant economic impact on a substantial number of small entities." Id. § 605(b).

"The RFA authorizes judicial review of an agency's compliance with many but not all of the statutory requirements." N.C. Fisheries Ass'n, Inc. , 518 F. Supp. 2d at 73 (citing 5 U.S.C. § 611(a) ). Courts can, for instance, determine an agency's compliance with the FRFA requirements set forth in section 604, but cannot adjudicate whether an agency violated the statute by failing to prepare an IRFA under section 603. See Allied Local & Reg'l Mfrs. Caucus v. EPA , 215 F.3d 61, 79 (D.C. Cir. 2000). And even when an agency's action is subject to judicial review, all that is required of the agency is "a ‘reasonable, good-faith effort to carry out [the RFA's] mandate.’ " U.S. Cellular Corp. , 254 F.3d at 88 (quoting Alenco Commc'n, Inc. v. FCC , 201 F.3d 608, 625 (5th Cir. 2000) ). Failure to comply with one or more of the statutory requirements, moreover, does not necessarily mean that the regulation must be invalidated. To the contrary, the D.C. Circuit has held that such an omission "may be, but does not have to be, grounds for overturning a rule." Cement Kiln Recycling Coal. v. EPA , 255 F.3d 855, 868 (D.C. Cir. 2001) (citation and internal quotation marks omitted); see also 5 U.S.C. § 611(a)(4) (authorizing courts to take "corrective action consistent with" the RFA, "including, but not limited to (A) remanding the rule to the agency, and (B) deferring the enforcement of the rule against small entities").

2. Section 965 and the "Transition Tax"

The RFA dispute in this case arises from the 2017 enactment of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017) ("TCJA" or the "Act"). According to the IRS, the TCJA was "the most sweeping tax law change in more than 30 years."¹ Included in that change were international tax rules. " Section 965, as amended by the Act, is intended to act as a transition provision between the international tax rules in place before the Act and those enacted by the Act." A.R. at 3522.² Prior to the TCJA, a U.S. corporation could defer foreign income from taxation by retaining earnings indefinitely through a foreign subsidiary. See Pls.’ Mot. for Summ. J., ECF No. 47 [hereinafter Pls.’ Mot.], Mem. of P. & A. in Supp. of Pls.’ Mot. for Summ. J., ECF No. 47-1 [hereinafter Pls.’ Mem.], at 2. The corporation paid U.S. tax only when the foreign "earnings were distributed to the domestic corporation." A.R. at 3522. The prior rules "encouraged domestic corporations to minimize distributions back to the United States and to accumulate substantial earnings offshore." Id. Under the rules enacted by the TCJA, to encourage repatriation of foreign income, "domestic corporations are in most circumstances entitled to a 100-percent deduction for any dividends received from their foreign subsidiaries, which eliminates any U.S. tax liability on the dividend." Id. (citing section 245A). To prevent a windfall, "whereby a domestic corporation could distribute its historical pre-Act earnings tax free to the United States, the Act included section 965 to treat those historical earnings as repatriated to the United States under the pre-Act rules, before the new rules took effect." Id.

Thus aptly referred to as a "transition tax" or "repatriation tax," section 965 imposes a one-time tax on U.S. shareholders³ of certain "specified foreign corporations" with "deferred foreign earnings[,] by deeming those earnings to be repatriated and included in the U.S. person's income" for the 2017 tax year. A.R. at 3522; 26 U.S.C. § 965(a). A specified foreign corporation is defined as "(A) any controlled foreign corporation,^{[4 ]} and (B) any foreign corporation with respect to which one or more domestic corporations is a United States shareholder." 26 U.S.C. § 965(e)(1).

The tax scheme created by section 965 is complicated, to say the least. The court here touches only on the relevant portions. The earnings included in the income of a U.S. shareholder under section 965(a) are generally subject to tax at two rates: "15.5 percent for the portion of earnings that does not exceed the amount of cash and certain cash equivalent assets held by the U.S. shareholder's specified foreign corporation, and 8 percent for the remaining earnings." A.R. at 3524; 26 U.S.C. § 965(c)(1). "These rate reductions are achieved through a deduction at the level of the United States shareholder." A.R. at 3524 (citing 26 U.S.C. § 965(c)(1) ). "[T]o calculate the appropriate deduction and determine the portion of the inclusion that is taxed at the 15.5 percent rate ..., a [U.S.] shareholder must determine its ‘aggregate foreign cash position.’ " Id. (quoting 26 U.S.C. § 965(c)(1)(A)(ii) ). "The statute defines ‘aggregate foreign cash position’...