Tag: IRS

“Conservatives’ Last Legal Option to Invalidate Obamacare”

The New Republic reports on an issue that Jonathan Adler and I have been highlighting: an IRS rule that will tax employers and subsidize private health insurance companies without congressional authorization. Why would the IRS issue such a rule? Perhaps because ObamaCare could collapse without it.

The post quotes another law professor who acknowledges the Obama administration faces a serious problem:

“It’s fairly decent textual case,” says Kevin Outterson, a professor at Boston University Law School, and health care blogger for The Incidental Economist. And if it stood, he says, the consequences could be disastrous.

Disastrous for ObamaCare, that is. But as Adler and I have written previously, if  saving ObamaCare means letting the IRS tax employers without congressional authorization, then ObamaCare is not worth saving.

‘The IRS Overstepped Its Bounds and Lacked the Power to Rewrite the Law’

Of course, that is just Reuters paraphrasing me:

Under the new healthcare law, individuals can shop and purchase health insurance through government-created exchanges. If a state refuses to set up its own exchange, the law allows the federal government to set one up instead. Due to a glitch in the original statute, individuals are only eligible for a tax credit if they buy insurance through a state exchange, not a federal one. That allows states to disrupt the system by refusing to set up their own exchanges. To fix this technical problem, the Internal Revenue Service issued a new rule, making the tax credit available for people who purchase insurance on federal exchanges. Conservative watchdogs, including Michael Cannon of the Cato Institute, say the IRS overstepped its bounds and lacked the power to rewrite the law. While no lawsuit has been filed yet, “we’re watching the whole exchange issue now,” said Diane Cohen of the Goldwater Institute.

One addition and three corrections.

  1. By spending that money illegally and issuing those illegal tax credits, the IRS is also triggering an illegal tax against employers (i.e., ObamaCare’s employer mandate).
  2. It’s not a “glitch.” It is a deliberate design feature.
  3. When the IRS lacks statutory authority to tax people or spend taxpayer dollars, but does both anyway, that lack of authority is not “technical problem.” It is called “taxation without representation.” And it is a very bad thing.
  4. I am not a conservative.

The IRS’s Illegal Employer Tax

With all eyes on the Supreme Court, whose ruling on ObamaCare’s individual mandate could come as early as today, almost no one noticed that last month the IRS imposed an illegal tax on employers of up to $3,000 per worker.

Jonathan Adler and I explain in today’s USA Today that this illegal tax is the indirect but very real result of the IRS offering ObamaCare’s tax credits and subsidies in health insurance “exchanges” created by the federal government, even though ObamaCare restricts those entitlements – explicitly, laboriously, and unambiguously – to Exchanges established by states.

That illegal action has the effect of imposing ObamaCare’s $2,000-$3,000 per worker tax (i.e., the “employer mandate”) on employers who otherwise would be exempt (i.e., employers in states that do not create an Exchange). Perhaps President Obama thought “taxation without representation” would be a winning campaign slogan.

If the Supreme Court fails to strike down ObamaCare’s employer mandate, Exchanges, and health insurance tax credits and subsidies, this thoroughly unconstitutional IRS rule will begin illegally taxing employers in 2014.

Reps. Scott DesJarlais (R-TN) and Phil Roe (R-TN) have introduced a resolution under the Congressional Review Act that would block the rule. Barring that, expect more angry employers to haul ObamaCare into federal court.

Adler discusses the IRS rule here:

Adler on How the IRS Is Rewriting ObamaCare to Tax Employers

Jonathan H. Adler is the Johan Verheij Memorial Professor of Law and director of the Center for Business Law and Regulation at Case Western Reserve University.  In this new Cato Institute video, Adler explains how a recently finalized IRS rule implementing ObamaCare taxes employers without any statutory authority.

For more, see this previous Cato video, “States Should Flatly Reject ObamaCare Exchanges”:

See also our November 2011 op-ed on this IRS rule that appeared in the Wall Street Journal.

You Do Know What Makes It a ‘Free’ Market, Right?

Here’s a poor, unsuccessful letter I sent to the editor of the Washington Post:

Health-care provision at center of Supreme Court debate was a Republican idea” [Mar. 27, A7] describes the health care law Mitt Romney signed while governor of Massachusetts as comprised of “free-market ideas.” Really?

RomneyCare’s individual mandate, now mirrored in ObamaCare, uses the power of the state to compel people to health insurance. What could be more un-free than that?

Supreme Court Gives Taxpayers a Muddled Win

This blogpost was co-authored by Cato legal associate Carl DeNigris.

Before the argument on the Arizona immigration case yesterday, the Supreme Court scored a blow for American taxpayers by rejecting the IRS’s attempt to overturn the Court’s prior interpretation of a disputed provision of the Internal Revenue Code, 26 U.S.C. §6501(e)(1)(A).  By avoiding the issue of whether agencies can use their regulatory powers retroactively, however, the Court didn’t go far enough.

In United States v. Home Concrete, the Court ruled that its decision in Colony v. Commissioner of Internal Revenue (1956) – that a taxpayer’s overstatement of tax basis in property is not an omission of income that would otherwise trigger an extended statute of limitations period for assessment – was still controlling.  The IRS had tried to change its interpretation of the relevant regulation but the Court concluded that, despite the government’s contention that the new interpretation was due judicial deference, “there is no longer any different construction that is consistent with Colony and available for adoption by the agency.”  That is, the IRS can’t unilaterally overturn Supreme Court precedent by changing how it interprets statutory language or applies a particular regulation.

But the Court didn’t address the government’s most insidious action here: the IRS sought deference for a regulation that it promulgated in the midst of litigation and which would have been retroactively applied to the taxpayers who were parties to the Home Concrete lawsuit.

In our amicus brief, Cato argued that sanctioning this sort of ad hoc, retroactive rulemaking undermines the rule of law by altering basic assumptions “regarding fairness and reliability of the laws and their application by the courts.”  Yet, with the exception of Justice Kennedy’s one sentence dismissal in dissent, the Court showed no interest in the retroactivity issue.  Moreover, it referred to the government’s blatant attempt at retroactive rulemaking as a mere “gap-filling regulation” with “no gap to fill.”  So while taxpayers won a narrow victory today, the Court’s silence gives little assurance that it remains a bulwark against arbitrary government power.

Perhaps even more importantly, it’s now unclear how courts are to apply an important precedent called Brand X, a 2005 case standing for the proposition that administrative agencies (like the IRS) can adopt regulations contrary to a judicial decision only when the relevant statute’s silence or ambiguity represents a congressional delegation of authority to fill that “gap” to the agency.  In other words, here the IRS acted contrary to clear statutory language as interpreted by Colony Cove, but what about future cases?  We’re no tax or even administrative law specialists, but it does seem that the Court has made a big mess out of Brand X:  When can an agency overturn decisions of the Court?  When can it not?  We’ll have to wait for the next ridiculous agency action to make its way to the Supreme Court to find out.

For more on the case, see here; for more technical administrative/tax law analysis, see here.  One other curious thing about this decision is that it ended up 5-4 but the majority opinion was written by Justice Breyer (who styles himself as the Court’s administrative law expert) and joined by the “conservative” justices – though Justice Scalia concurs only in part – with Justice Kennedy writing the dissent, joined by the remaining three “liberal” justices.

Suing the IRS for Fun and Liberty

This blogpost was coauthored by Cato legal associate Chaim Gordon.

On Tuesday, the Institute for Justice brought a lawsuit to stop recent IRS regulations that require independent tax return preparers to pay a yearly registration fee, take a competency exam, complete 15 hours of IRS-approved continuing education every year, and possibly subject themselves to mandatory fingerprinting. Our colleague Dan Mitchell observed two years ago that these regulations appear to be the result of “regulatory capture.” As the Wall Street Journal explained:

Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.

Indeed, as others have already noted, one of the architects of this licensing scheme is Mark Ernst, former CEO of H&R Block. These protectionist regulations were even cited by UBS as a reason to buy H&R Block stock, on the grounds that they will “add barriers to entry (or continuation) for small preparers.”

In defending the need for these regulations, IRS Commissioner Douglas Shulman’s most insightful explanation was that “in most states you need a license to cut someone’s hair.” This statement undoubtedly caught IJ’s attention because that “merry band of litigators” has devoted itself to fighting such senseless and corrupt regulations (including in hair salons).

But these regulations are not just misguided and corrupt.  They are, as IJ’s complaint contends, simply beyond the IRS’s regulatory authority. The IRS claims the power to regulate tax return preparers under 31 U.S.C. § 330. But that statute only authorizes the IRS to regulate “the practice of representatives of persons,” and tax return preparers do not represent persons before the IRS and do not “practice” in the sense that lawyers do when they appear before a court. Taxpayers are only “represented” when they authorize someone to act on their behalf before the IRS in an exam, controversy, or litigation setting. This is especially clear in light of the statute’s plain purpose, which is to ensure that such representatives have the “competency to advise and assist persons in presenting their cases” (emphasis added).

Moreover, under the IRS’s expansive reading of the law, which puts under the agency’s purvey “all matters” connected with a “presentation” to the IRS, anyone who advises another about the tax aspects of a particular transaction could theoretically be guilty of unauthorized practice before the IRS. Congress clearly meant no such thing. In fact, Congress specifically amended 31 U.S.C. § 330 to allow the IRS to regulate the provision of written advice that the IRS “determines as having a potential for tax avoidance or evasion.” Such additional authority would be unnecessary under the IRS’s broad reading of the original statute.

IJ had previously warned the IRS that its then-proposed regulations were unfair to mom-and-pop tax return preparers and exceeded its statutory authority, but the IRS neither altered its plan nor explained why it thinks that it has the authority to regulate tax return preparers in the first instance. Now the IRS will have to explain its power grab to a federal judge.

Watch IJ’s excellent case launch video.  IJ attorney Dan Alban explains the case in an editorial here and in an interview here.