Summary Judgment Sought in Challenge to Transition Tax Rules

MONTE SILVER and MONTE SILVER, LTD., an Israel corporation
Plaintiffs
v.
INTERNAL REVENUE SERVICE; UNITED STATES DEPARTMENT OF THE TREASURY; CHARLES RETTIG, in his official capacity as Commissioner of the Internal Revenue; and STEVEN MNUCHIN, in his official capacity as United States Secretary of the Treasury
Defendants

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

Judge Amit P. Mehta

MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

In accordance with Rule 56 of the Federal Rules of Civil Procedure and Local Rules 7(a), (e) and (h), Plaintiffs Monte Silver and Monte Silver Ltd. respectfully submit this Memorandum of Points and Authorities in support of their Motion for Summary Judgment which is being filed concomitantly with this Memorandum. The Court is also referred to the Declaration of Monte Silver (“Silver Decl.”), the Administrative Record (“AR”) provided by the Defendants (ECF 38), the Supplemental Record (“PR”) attached to this this Memorandum as the Appendix and the Proposed Order attached hereto.

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TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF AUTHORITIES

CERTIFICATE OF SERVICE

APPENDIX TO THE MEMORANDUM OF POINTS AND AUTHORITIES

TABLE OF AUTHORITIES

Cases

Alfa Int'l Seafood v. Ross, 264 F. Supp. 3d. 23 (D.D.C. 2017)

Am. Biosci., Inc. v. Thompson, 269 F.3d 1077 (D.C. Cir. 2001)

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)

Ardmore Consulting Grp., Inc. v. Contreras-Sweet, 118 F. Supp. 3d 388 (D.D.C. 2015)

BellSouth Corp. v. FCC, 162 F.3d 1215 (D.C. Cir. 1999)

Butte Cnty., Cal. v. Hogen, 613 F.3d 190 (D.C. Cir. 2010)

Cablevision Sys. Corp. v. Fed. Commc'ns Comm'n, 649 F.3d 695 (D.C. Cir. 2011)

Charleston Area Medical Center v. Burwell, 216 F. Supp.3d 18 (D.D.C. 2016)

CIC Services LLC v. Internal Revenue Service, 925 F.3d 247, 258 (6th Cir. 2019), cert. granted, 2020 WL 2105208 (May 4, 2020)

City. of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir.1999) cert. denied, 530 U.S. 1204 (2000)

Department of Commerce v. New York, 139 S. Ct. 2551 (2019)

DIRECTV, Inc. v. F.C.C., 110 F.3d 816 (D.C. Cir. 1997)

Enochs v. Williams Packing & Navigation Co., 370 U.S. 1 (1962)

Farrell v. Tillerson, 315 F. Supp.3d 47 (D.D.C. 2018)

GTE Serv. Corp. v. F.C.C., 205 F.3d 416 (D.C. Cir. 2000)

Hispanic Affairs Project v. Acosta, 263 F. Supp. 3d 160 (D.D.C. 2017), affirming in part and reversing in part on other grounds, 901 F.3d 378 (2018)

Lee Mem'l Health Sys. v. Burwell, 206 F. Supp. 3d 307 (D.D.C. 2016), aff'd sub nom. Billings Clinic v. Azar, 901 F.3d 301 (D.C.Cir. 2018)

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983)

Nat'l Courier Ass'n v. Bd. of Governors of Fed. Reserve Sys., 516 F.2d 1229 (D.C. Cir. 1975)

National Truck Equipment Ass'n v. National Highway Traffic Safety Admin., 919 F.2d 1148 (6th Cir. 1990), reh. denied, 928 F.2d. 739 (6th Cir. 1991)

North Carolina Fisheries Ass'n v. Daley, 27 F. Supp. 2d 650 (E.D. Va. 1998)

Orion Reserves Ltd. P'ship v. Salazar, 553 F.3d 697 (D.C. Cir.), cert. denied, 558 U.S. 822 (2009)

Safe Extensions, Inc. v. FAA, 509 F.3d 593 (D.C. Cir. 2007)

Seeger v. U.S. Dep't of Defense, 2019 WL 2058721 (D.D.C., May 9, 2019)

South Carolina v. Regan, 465 U.S. 367 (1984)

Southern Offshore Fishing Ass'n v. Daley, 995 F. Supp. 1411 (M.D. Fla. 1998)

U.S. Cellular Corp. v. FCC, 254 F.3d 78 (D.C. Cir. 2001)

United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, et. al. v. Federal Highway Administration, et. al., 151 F. Supp.3d 76 (D.D.C. 2015)

Statutes

15 U.S.C. §632(a)(1)

28 U.S.C. §2412(d)

44 U.S.C. §3501(1)

44 U.S.C. §3506(c)

44 U.S.C. §3506(c)(3)(C)(i)

44 U.S.C. §3506(c)(3)(D)

5 U.S.C. §601

5 U.S.C. §601(3)

5 U.S.C. §603

5 U.S.C. §6044

5 U.S.C. §604(a)(2)

5 U.S.C. §604(a)(4)

5 U.S.C. §604(a)(5)

5 U.S.C. §604(a)(6)

5 U.S.C. §605(b)

5 U.S.C. §609(a)

5 U.S.C. §611

5 U.S.C. §611(a)

5 U.S.C. §611(a)(2)

5 U.S.C. §611(a)(4)

5 U.S.C. §611(a)(4)(A)

5 U.S.C. §632(a)(2)(A)

5 U.S.C. §706(2)(A)

5 U.S.C. §706(2)(D)

Rules

Fed. R. Civ. P. 56(a)

Regulations

13 C.F.R. § 121.201

Legislative History

Regulatory Flexibility Act Amendments, Committee on Small Business, H.R. REPT. No. 104-49 (Feb. 23, 1995)

Small Business Regulatory Enforcement Fairness Act, 142 CONG. REC. SENATE, No. 46 (daily ed., Mar. 29, 1996)

Small Business Regulatory Enforcement Fairness Act — Joint Managers Statement of Legislative History and Congressional Intent, 142 CONG. REC. S3245 (daily ed. Mar. 29, 1996)

Law Reviews

Kristin E. Hickman, Restoring the Lost Anti-Injunction Act, 103 VA. L. REV. 1683 (2017)

Thomas O. Sargentich, The Small Business Regulatory Enforcement Fairness Act, 49 ADMIN. L. REV. 123 (1997)

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I. INTRODUCTION

This case centers around Defendants' violation of three federal statutes — the Administrative Procedure Act (APA), the Regulatory Flexibility Act (RFA) and the Paperwork Reduction Act (PRA) establishing procedural safeguards to protect small businesses which federal agencies must follow when they promulgate regulations. Defendants violated these statutes when they issued proposed and final regulations implementing and interpreting Code Section 965, enacted as part of the Tax Cuts and Jobs Act (“TCJA”) in December 2017.¹ Those proposed and final regulations are the subject of this litigation.

The RFA is the primary statutory safeguard designed to protect small businesses from the overwhelming burdens imposed upon such businesses created by statutes and regulations designed for large companies.² Amongst other provisions, the RFA required Defendants to publish a regulatory flexibility analysis containing an in-depth analysis and description of any possible alternatives and exemptions that regulations could employ to reduce the burdens upon small businesses. Where an agency issues proposed or final regulations without complying with the RFA, the reviewing court is required to remand the regulation to the agency and provide other equitable relief as it deems appropriate.

As we shall demonstrate in this Memorandum, when issuing the proposed and final regulations, the Defendants violated the letter and spirit of the RFA and PRA. In doing so, Defendants have breached their duties under the APA.

II. STATEMENT OF MATERIAL FACTS

A. Statutory and Legal Background

1. The TCJA and the Transition Tax

Historically, large U.S. multinational corporations such as Google and Apple were not subject to U.S. taxation on profits earned by their subsidiaries. Rather, these U.S. multinational corporations paid U.S. tax only when the profits were received from their “controlled foreign corporations”, or “CFCs” by way of dividends. Thus, prior law incentivized these corporations to shift profits from the United States to subsidiaries in low tax jurisdictions overseas.

In order to get U.S. corporations to repatriate their foreign profits to the United States, the TCJA adopted the Transition Tax, the principal focus of which was to impose U.S. tax on the more than $2 trillion in profits that were held in these CFCs. The mechanism to accomplish this was relatively simple: subject the CFC's U.S. shareholders themselves to a one-time tax on the accumulated profits held by their CFCs. However, the statutory language employed in Section 965 did not distinguish between CFCs owned by conglomerates like Google and Apple and CFCs of individual U.S. citizens conducting even the smallest business through a foreign company, like Plaintiff Monte Silver, Ltd.

2. The RFA, PRA and APA: Statutes Protecting Small Business During the Rulemaking Process.

Three statutes govern the procedures agencies must follow to protect the interests of small business in promulgating regulations: the RFA, the PRA, and the APA. As explained below, Defendants violated all three statutes in issuing the proposed and final regulations.

(a) The Regulatory Flexibility Act (RFA)

The RFA, 5 U.S.C. §601 et seq., is the principal statute providing protection for small business during development of regulations. In enacting the RFA in 1980, Congress codified its purpose of protecting small business from unduly burdensome regulations, stating that:

5 U.S.C. §601.

To accomplish these goals, the RFA requires an agency to prepare both an initial and final regulatory flexibility analysis when it issues proposed and final regulations (an “RFA Analysis”). 5 U.S.C. §§603-604; U.S. Cellular Corp. v. FCC, 254 F.3d 78, 88 (D.C. Cir. 2001) (the RFA “obliges federal agencies to assess the impact of their regulations on small businesses.”). Among other things, the RFA requires agencies to accompany each final rule with a “final regulatory flexibility analysis” which must address certain subject matter areas prescribed by 5 U.S.C. §604, including³:

The RFA creates one exception to the requirement of preparing an initial or final RFA Analysis. An analysis is not required if the “head of the agency [. . .] certifies that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.” 5 U.S.C. §605(b). If the agency head so certifies, it must publish the certification, “along with a statement providing the factual basis for such certification.” Id.

Notably, the RFA “requires agencies to publish their factual, policy and legal reasons when making a certification under Section 605.” Small Business Regulatory Enforcement Fairness Act — Joint Managers Statement of Legislative History and Congressional Intent, 142 CONG. REC. S3245 (daily ed. Mar. 29, 1996). One of the primary purposes of the RFA is to reduce the compliance burdens on small entities whenever possible under the statute. To accomplish this purpose, “the IRS should take an expansive approach [. . .] when considering whether to conduct a regulatory flexibility analysis.” Id. See also, Thomas O. Sargentich, The Small Business Regulatory Enforcement Fairness Act, 49 ADMIN. L. REV. 123, 124 (1997) (“the underlying premise of the RFA was to require that agencies conducting notice-and-comment rulemaking consider fully the effects of such rulemaking on 'small entities'”).

The 1996 amendments significantly bolstered the policies of the 1980 legislation by also authorizing judicial review of agency compliance with these requirements. Any “small entity that is adversely affected or aggrieved by final agency action is entitled to judicial review of agency compliance with the requirements [. . .]”. 5 U.S.C. §611(a). An agency's factual certification under 5 U.S.C. §605(b) is specifically identified as an issue subject to judicial review under 5 U.S.C. §611. Review of a Section 605(b) certification is to be conducted “in accordance with” the APA. 5 U.S.C. §611(a)(2).

Finally, where a reviewing court concludes that an agency has violated the RFA, “the court shall order the agency to take corrective action [. . .], including, but not limited to: (a) remanding the rule to the agency, and (b) deferring the enforcement of the rule against small entities [. . .]” 5 U.S.C. §611(a)(4)(A) and (B).

(b) The Paperwork Reduction Act (“PRA”)

The PRA imposes additional requirements upon agencies issuing regulations to protect the

concerns of small business. The purpose of the PRA is to “minimize the paperwork burden for individuals, small businesses, educational and nonprofit institutions, Federal contractors, State, local and tribal governments, and other persons resulting from the collection of information by or for the Federal Government.” 44 U.S.C. §3501(1).

The PRA requires that agencies certify with a supporting factual record that the proposed regulations reduce the compliance burdens on small business and reduce to the extent practicable and appropriate the burden on persons who shall provide information to or for the agency, including with respect to small entities, as defined under section 601(6) of title 5, the use of such techniques as —

44 U.S.C. §3506(c)(3)(C)(i)-(iii).

An agency must also certify that the regulation is written using plain, coherent, and unambiguous terminology and is understandable to those who are to respond. 44 U.S.C. §3506(c)(3)(D).

(c) Administrative Procedure Act (APA)

As noted above, courts review the compliance of an agency with the RFA and PRA under the APA, which empowers the court to “hold unlawful and set aside agency action, findings, and conclusions found to be [. . .] arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. §706(2)(A). In addition, a reviewing court shall hold an agency action unlawful if it was “without observance of procedure required by law.” 5 U.S.C. §706(2)(D). See United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, et. al. v. Federal Highway Administration, et. al., 151 F. Supp.3d 76, 92-93 (D.D.C. 2015) [per Mehta, J.].

See also discussion below re Part III Standard of Review.

B. Factual Background

Monte Silver (“Silver”) is a United States citizen residing in Israel. He studied, lived and practiced law in the United States before moving to Israel in 1997. Silver Decl., ¶2. He is a member of the California and Israel bars. Silver Decl., ¶2. Monte Silver, Ltd. (“Limited”) is an Israeli corporation through which Silver practices law. Silver Decl., ¶2. Silver has always been the sole shareholder and sole employee of Limited. ECF 5, ¶3; Silver Decl., ¶2. For U.S. tax purposes, Silver has reported Limited as a CFC on Form 5471 “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”. ECF 5, ¶6; Silver Decl., ¶2. Accordingly, Limited and Silver are both subject to Code Section 965 and the Final Regulations.

Silver has individually invested in U.S. commercial real estate since 2009. He reports this business activity on his individual tax return. Silver Decl., ¶3.

Plaintiffs filed their respective 2017 tax returns to the best of their ability, given the complexity of the statute and the utter impenetrability of the proposed and final regulations. Silver Decl., ¶18. In addition, since 2017, Plaintiffs have amended their tax returns twice as their understanding of the statute and regulations grew following hours of painstaking study and analysis of the otherwise inscrutable rules. Silver Decl., ¶18. At no time did Plaintiffs owe any Transition Tax, nor do they have any reason to believe they ever will. Silver Decl., ¶18. However, the compliance costs and time the Plaintiffs have spent and will continue to spend in the coming years merely to comply with the statute and Final Regulations have been and will continue to be significant. Silver Decl., ¶18. Defendants do not dispute that these compliance obligations extend for years into the future. ECF 34, ¶58. Plaintiffs are not the subject of any audit, enforcement, or collection effort by the Defendants regarding the Transition Tax or any other matter relating to the 2017 tax year. Silver Decl., ¶19.

On December 22, 2017, President Donald Trump signed the TCJA into law. Shortly thereafter Silver realized that the Transition Tax impacted him, and others similarly situated. Silver Decl., ¶15. On or about March 8, 2018, Silver organized a small-business email campaign aimed at advising Defendants of the significant impact that the Transition Tax imposed on small businesses. Silver Decl., ¶7. From mid-March 2018 and throughout that year, a significant number of small business owners began emailing Defendants to advise Defendants of the harm that the Transition Tax was causing small businesspersons like themselves. AR 1690-2226, AR 2227-2277; see also PR 86. Defendants admit this. ECF 34, ¶35.

On March 20, 2018, Silver met with Assistant Secretary of the Treasury (International) Lafayette “Chip” Harter in Washington D.C. PR 91. At the meeting, various forms of relief were discussed and Chip agreed to provide the first form of relief within days. PR 90-91. The relief (“First Relief”) was issued April 2, 2018 and provided for an extension of the filing date to June 15. Id.

After two more months of work, on June 4, 2018, Defendants issued small businesses a second and more significant relief (“Second Relief”). AR 682, item QA15; PR 87; ECF 34, ¶21. The Second Relief was “signed off” by Secretary Mnuchin himself. PR 87.

On August 9, 2018, the Treasury published proposed regulations for the first time, Notice of Proposed Rulemaking, Guidance Regarding the Transition Tax under Section 965 and Related Provisions, 83 FED REG. 39514 (Aug. 9, 2018) (the “NPRM”). AR 3554-3615. The NPRM was massive, consisting of the proposed regulations and a lengthy preamble explaining many of the concepts, rules, and determinations employed in the proposed regulations.

The NPRM did not contain an initial RFA Analysis (an “IFRA”) as required under 5 U.S.C. §603. ECF 34, ¶24. Instead, the NPRM contained a certification that the proposed regulations would not have “a significant economic impact on a substantial number of small entities.” AR 3580-81. The certification did not include a single substantiating fact — an issue that Silver raised with Defendants on numerous occasions. PR 94, 103, 113. The NPRM estimated that 100,000 taxpayers would be subject to the proposed regulations and that the average taxpayer would require five hours each year to comply with the Proposed Regulations. AR 3554.

Following the publication of the NPRM, Silver and approximately 400 similarly situated small business owners all emailed Defendants and submitted formal comments to the proposed regulations advising Defendants of the tremendous harm that the statute and proposed regulations had caused and would continue to cause them, AR 1690-2226, AR 2227-2277, comprising of dozens of formal comments. AR 982-2985. In fact, more than half of all the formal comments received during the comment phase came from small business owners in which they described the huge burden that the statute and regulations had placed upon them. ECF 34, ¶34.

In addition, following the issuance of the proposed regulations, Silver repeatedly sent emails to Defendants detailing alleged violations of the RFA and PRA. ECF 34, ¶32; PR 86-135; AR 2459-2492.

These concerns were reiterated at a public hearing on the NPRM held on October 22, 2018. AR958-961,971.Atthe hearing,a representative of American Citizens Abroad, Inc. (https://www.americansabroad.org), spoke at length about Defendants' failure to comply with the RFA, the compliance burdens faced by small businesses, and the need for a de minimis exception. The impact of the Transition Tax on individual shareholders was covered by tax experts as well. AR 2990-2999.

Early in 2019, the Treasury issued the Final Regulations. AR 3136-3213.The Final Regulations were even more voluminous than the NPRM, covering nearly 100 pages of very fine print in the Federal Register. 84 FED. REG. 1838. The Final Regulations did not contain a Final Regulatory Flexibility Analysis. ECF 34, ¶39. Instead, they included a putative certification under 5 U.S.C. §605(b):

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the final regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (“small entities”) [. . .] Regardless of the number of small entities potentially affected by section 965 or the final regulations, the Treasury Department and the IRS have concluded that there is no significant economic impact on such entities as a result of the final regulations. AR 3355-3356

On many occasions, Silver attempted to resolve this matter amicably and propose simple solutions to achieve this. PR 93-122. All these efforts were totally ignored by the Defendants.

C. Procedural History

In the wake of Defendants' failure to respond to the entreaties of Silver and other small business owners, on January 30, 2019, Plaintiffs commenced this lawsuit. ECF 1. On March 26, 2019, Plaintiffs filed their first amended complaint (“FAC”). ECF 5. On July 1, 2019, Defendants filed a motion to dismiss for lack of jurisdiction, contending, among other things, that Plaintiffs lacked Article III standing and that subject matter jurisdiction was barred under the Anti-Injunction Act (“AIA”). ECF 21. On December 24, 2019, the Court denied Defendants' motion to dismiss holding specifically that Plaintiffs had Article III standing. The Court also rejected Defendants' AIA challenge, ruling that the present litigation does not seek a refund or impede collection of taxes, but is simply an attempt to get the Defendants “to do what the law requires — Regulatory Flexibility Act and Paperwork Reduction Act analyses.” ECF 29, at 6.

Subsequently, on February 7, 2020, Defendants filed their Answer to the FAC. ECF 34. On April 2, 2020, Defendants submitted the administrative record. ECF 38. On April 27, 2020, Defendants certified the administrative record. ECF 41. On April 22, 2020, Plaintiffs moved to complete the administrative record by adding supplemental items not included by Defendants. ECF 39. By Minute Order dated April 24, 2020, the Court reserved ruling on Plaintiffs' request to add to the administrative record pending the parties' summary judgment briefing. Defendants filed their opposition to Plaintiffs' motion to complete the administrative record on May 6, 2020⁴. ECF 42.

III. STANDARD OF REVIEW

A motion for summary judgment, in general, must be granted when there is no genuine issue of material fact, such that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The non-moving party may not rely solely on allegations or conclusory statements and to defeat a summary judgment motion. It must establish more than 'the mere existence of a scintilla of evidence' in support of its position.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986).

In cases involving judicial review of agency action — such as this case — the summary judgment rules operate somewhat differently. “[T]he district judge sits as an appellate tribunal” and “[t]he entire case on review is a question of law.” Am. Biosci., Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001) (internal quotation marks omitted). In this posture, the court must decide “whether as a matter of law the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review.” Alfa Int'l Seafood v. Ross, 264 F. Supp. 3d. 23, 30 (D.D.C. 2017) [per Mehta, J.].

RFA-related challenges are reviewed in accordance with the APA. 5 U.S.C. §611(a)(2). An agency decision is arbitrary and capricious if it entirely failed to consider an important aspect of the problem, “offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view.” Lee Mem'l Health Sys. v. Burwell, 206 F. Supp. 3d 307 (D.D.C. 2016) aff'd sub nom. Billings Clinic v. Azar, 901 F.3d 301 (D.C.Cir. 2018), citing Cablevision Sys. Corp. v. Fed. Commc'ns Comm'n, 649 F.3d 695, 714 (D.C. Cir. 2011) (quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). An agency's decision must be based on the relevant data and must be accompanied by a satisfactory explanation for the decision which demonstrates a “rational connection between the facts found and the choice made.” Department of Commerce v. New York, 139 S. Ct. 2551, 2569 (2019). No such rational basis can exist where the agency has failed to consider factors relevant to its inquiry or has relied on impermissible factors or where the agency has committed a “clear error of judgment.” In such a case the court must undo the agency action. GTE Serv. Corp. v. F.C.C., 205 F.3d 416, 421-22 (D.C. Cir. 2000); DIRECTV, Inc. v. F.C.C., 110 F.3d 816, 826 (D.C. Cir. 1997). When an agency fails to provide a reasoned explanation, or where the record belies the agency's conclusion, the court must undo its action. Hispanic Affairs Project v. Acosta, 263 F. Supp. 3d 160 (D.D.C. 2017), affirming in part and reversing in part on other grounds, 901 F.3d 378 (2018); City. of Los Angeles v. Shalala, 192 F.3d 1005, 1021 (D.C. Cir. 1999), cert. denied, 530 U.S. 1204 (2000) (quoting BellSouth Corp. v. FCC, 162 F.3d 1215, 1222 (D.C. Cir. 1999).

The record must be supported by substantial evidence — otherwise it would be arbitrary and capricious. Safe Extensions, Inc. v. FAA, 509 F.3d 593, 604 (D.C. Cir. 2007); Ardmore Consulting Grp., Inc. v. Contreras-Sweet, 118 F. Supp.3d 388, 394 (D.D.C. 2015). An agency's factual findings should be set aside when no reasonable factfinder could have reached the agency's conclusion, or when the agency has ignored evidence contradicting its position. Ardmore at 394, citing Orion Reserves Ltd. P'ship v. Salazar, 553 F.3d 697, 704 (D.C. Cir.) cert. denied, 558 U.S. 822 (2009) and Butte Cnty., Cal. v. Hogen, 613 F.3d 190, 194 (D.C. Cir. 2010).

IV. ARGUMENT

The issues that need to be addressed for summary judgment are as follows (A) are Plaintiffs “small entities” under the RFA?; (B) were the Defendants' certifications issued under the RFA (i) arbitrary, capricious, an abuse of discretion, (ii) issued without observance of procedure required by law, or (iii) unsupported by substantial evidence?; and (C) were Plaintiffs adversely affected and aggrieved by Defendants' failure to comply with the procedural safeguards afforded under the RFA.

As we shall now demonstrate, the answers to the above questions are all in the affirmative.

A. Plaintiffs are small businesses under the RFA

Under the RFA, the term “small business” shall have the same meaning as the term is defined under section 3 of the Small Business Act (“SBA”). 5 U.S.C. §601(3). The PRA also incorporates this definition. PRA, §3506(c).

According to the SBA, a “small business” is “one which is independently owned and operated and which is not dominant in its field of operation.” 15 U.S.C. §632(a)(1). The Administrator of the Small Business Administration may specify detailed definitions or standards by which a business concern may be determined to be a small business concern. 15 U.S.C. §632(a)(2)(A).

The Small Business Administration has established size standards based on the North American Industry Classification System (NAICS), a publication of the Office of Management and Budget. 13 C.F.R. §121.201. A law firm is a “small business concern” if it has annual receipts of less than $12,000,000. A real estate business is a “small business concern” if it has annual rental receipts of less than $30,000,000⁵.

As set forth in the Silver Decl., both Plaintiffs operate small businesses that are independent, not dominant in their field, and within the above numerical parameters. Silver Decl., ¶¶2-3. Accordingly, Plaintiffs are each a small business under the SBA and hence under the RFA.

B. Defendants' certifications under the RFA/PRA

As set forth above, no initial or final RFA Analysis was conducted with respect to the proposed or final regulations. ECF 34, ¶¶24, 39. Defendants avoided these requirements by certifying “that the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities.” 5 U.S.C. §605(b). If the agency head so certifies, the agency must publish the certification, “along with a statement providing the factual basis for such certification.”

The RFA “requires agencies to publish their factual, policy and legal reasons when making a certification under Section 605.” Small Business Regulatory Enforcement Fairness Act, 142 CONG. REC. SENATE, No. 46 at S3245 (daily ed., Mar. 29, 1996). To accomplish this purpose, the IRS should take an “expansive approach [. . .] when considering whether to conduct a regulatory flexibility analysis.” Id. “Simple boilerplate statements that the rule will not have such an effect are patently inadequate under the RFA. Rather, sufficient analysis must be performed to apprise the regulated community of the reasons for the certification. Moreover, any doubt as to whether a regulatory flexibility analysis should be performed must be resolved in favor of performing the analysis.” Regulatory Flexibility Act Amendments, Committee on Small Business, H.R. REPT. NO. 104-49, Part 1, at 7 (Feb. 23, 1995).

1. RFA certification issued as part of the Proposed and Final Regulations

(a) Certification issued under the proposed regulations.

A simple review of the brief certification issued as part of the proposed regulations quickly reveals that it contains not a single fact, rather is made up of a few unclear and expressly contradictory statements. AR 3580-81. On numerous occasions, Silver advised Defendants that the certification was devoid of any facts. PR 94, 103, 113. By failing to set forth any factual basis, this certification fails to meet the threshold requirements of 5 U.S.C. §605(b).

(b) Both certifications of the proposed and final regulations are arbitrary and capricious.

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. The very opposite is true. The administrative record is replete with evidence showing that the proposed and final regulations would have a severe impact on a large number of small businesses. PR 86-138; AR 682, 958-961, 971, 1690-2226, 2227-2277; dozens of formal comments AR 982-2985, 2990-2999. See also ECF 34, ¶¶21, 32, 34-35. Accordingly, the lack of any factual basis in the Certification exacerbates the underlying issue, to wit: Defendants' assumption that the proposed and final regulations would not severely impact small businesses is simply wrong and arbitrary. Southern Offshore Fishing Ass'n v. Daley, 995 F. Supp. 1411 (M.D. Fla. 1998) (finding certification to be against the evidence in the administrative record); see also North Carolina Fisheries Ass'n v. Daley, 27 F. Supp. 2d 650 (E.D. Va. 1998) (same).

Therefore, not only was the Defendants' disregard of the RFA “not in accordance with the law” and “without observance of procedure required by law” — see Farrell v. Tillerson, 315 F. Supp.3d 47, 65 (D.D.C. 2018) — their actions were also “arbitrary and capricious” for being in blatant disregard of the factual record before them.

The actions, or rather inaction, of Defendants in the present case fall squarely within the classic description of arbitrary and capricious agency conduct. As Defendants' certification is based on no evidence whatsoever, no reasonable factfinder could have reached Defendants' conclusion.⁶ In sum, Defendants have run afoul of the RFA, and hence the APA, in the following ways:

• Defendants utterly failed to consider the most central issue at the core of the RFA: whether the proposed and final rules would have a significant economic impact on a substantial number of small entities.

• Defendants' certification ran counter the evidence before the agency. The record contained a vast amount of evidence that the proposed and final rules would have a significant economic impact on a substantial number of small entities number. And there was not one iota of evidence to suggest otherwise.

• Defendants fail to provide a reasoned explanation for their conclusion that the proposed and final rules would not have a significant economic impact on a substantial number of small entities number. In fact, the record belies Defendants' conclusion.

2. The PRA-Certification does not exist or is invalid.

The PRA is quite clear: any proposed rule must contain a certification, backed by a record supporting such certification, that attests to various issues. PRA 3506(c). The administrative record here contains no certification at all. The only evidence that Defendants even considered PRA procedural safeguards is a single checklist entitled “Paperwork Reduction Act Submission”. AR 3125-3130 and AR 3544-3552. Nothing in this document qualifies as a certification.

Even if this checklist were deemed to include certifications, such certifications would be arbitrary and capricious for lack of any supporting documentation or other evidence. The PRA required Defendants to address the following issues.

C. Plaintiffs are adversely affected and aggrieved by Defendants' Failure to Comply with the Procedural Safeguards of the RFA and PRA

Both Plaintiffs have been and will continue to be adversely affected and aggrieved by the

(a) Plaintiff Limited.

Plaintiff Limited has been, and will continue to be, directly affected and aggrieved by

Defendants' failure to comply with the procedural safeguards of the RFA and PRA. This fact is supported by the Court's denial of Defendants' motion to dismiss (ECF 29, at 3-4), and further established by the Silver Decl. This injury consists of compliance costs directly related to the Transition Tax and the final regulations that Limited has incurred and will continue to incur for years to come. Silver Decl., ¶18 Defendants indeed concede that taxpayers subject to the statute and regulations will incur such compliance costs for years to come. ECF 34, ¶58.

(b) Plaintiff Silver

Silver, individually, is a small business under the RFA on account of his investing in U.S. commercial estate real estate since 2009. He reports this business activity annually on his U.S. tax return, unrelated to the business of Silver Ltd. Silver Decl., ¶3. As established above, Silver qualifies as a “small business” under the SBA and RFA.

In addition, Silver is the sole employee and shareholder of Limited. Thus, every marginal dollar that Limited has paid and will pay in compliance costs that are directly attributable to the Transition Tax and the Final Regulations is a dollar less available to Silver from the company in the form of dividends, salary or bonuses.

Accordingly, Plaintiffs, who have standing, and, as shown, have been adversely affected by the final regulations, are entitled to relief under the RFA, PRA, APA, and Section 212 (as defined in fn. 1 above) which requires Defendants to publish one or more guides to assist small entities in complying with the rule.

D. Summary Judgment is Proper

For all the reasons set forth above, Plaintiffs' motion for summary judgment must be granted.

The record demonstrates that Defendants opted to issue an RFA-certification instead of conducting and issuing an initial and final RFA Analysis. The certification issued with the proposed regulations was devoid of any factual basis that could serve to support the certification. In addition, the record also clearly indicates that there was no room for issuing any certification, as it is obvious that the proposed and final regulations had, in fact, a significant economic impact on a substantial number of small entities. Defendants violations under the RFA and PRA, thus, constitute a breach of their duties under the APA because their actions were arbitrary, capricious and not in accordance with the law — 5 U.S.C. §706(2)(A) — and “without observance of procedure of law.” 5 U.S.C. §706(2)(D).

As such, summary judgment against the Defendants is proper. See North Carolina Fisheries Ass'n v. Daley, supra (awarding summary judgment when the RFA-certification was devoid of any factual basis); National Truck Equipment Ass'n v. National Highway Traffic Safety Admin., 919 F.2d 1148 (6th Cir. 1990), reh. denied, 928 F.2d. 739 (6th Cir. 1991) (held that the administration's conclusory statement that the standard would not have a great impact on small business, with no evidentiary support in the record, did not prove compliance with the RFA).

V. PLAINTIFFS ARE ENTITLED TO EFFECTIVE RELIEF

In granting relief under the RFA, a court “shall order” the agency to “take corrective action consistent with” the RFA and the APA. 5 U.S.C. §611(a)(4). This relief includes, but is not limited to (a) remanding the rule to the agency for compliance; and (b) deferring enforcement of the rule against small entities, unless the court finds that continued enforcement of the rule is in the public interest.” In addition, the RFA does not limit the authority of a court to stay the effective date of any rule or provision thereof under any other provision of law or to grant any other relief in addition to the requirements of this section. Id.

Plaintiffs seek the following relief in this action:

As to the interplay between the AIA and Plaintiffs' request to delay the enforcement of the final regulations, the legislative intent is clear: Courts have “broad discretion to formulate appropriate remedies under the facts and circumstances of each case.” 142 CONG. REC. SENATE, supra at S3244-3245 “The rights of judicial review and remedial authority of the courts provided in the Act as to IRS interpretive rules should be applied in a manner consistent with the purposes of the AIA which may limit remedies available in particular instances.” Id. (emphasis supplied).

The RFA “also directs the court to consider the public interest in determining whether or not to delay the enforcement of the rule against small entities pending agency compliance with the court's findings. This language should be read to require the court to give appropriate deference to the legitimate public interest in the assessment and collection of taxes reflected by the Anti-Injunction Act.” Id. (emphasis supplied).

The purpose of the AIA is well established. The Supreme Court has repeatedly held that the AIA was intended to protect tax revenues from judicial interference and to require that the legal right to the disputed sums be determined in a suit for refund. Enochs v. Williams Packing & Navigation Co., 370 U. S. 1,7 (1962); see also South Carolina v. Regan, 465 U.S. 367, 386 (1984).

In this case, delaying the enforcement of the rule against Plaintiffs and small business will in no way impact the ability of Defendants to collect Transition Tax for two reasons:

Finally, as to legitimate public interest, Defendants' conduct in this case is not an isolated incident. Rather, it is an example of the Defendants' pattern of ignoring the requirements of the RFA and the interests of small business. In 2015, a General Accountability Office Report found that the IRS complied with the Regulatory Flexibility Act with respect to only two of the over 200 tax regulations issued between 2013 and 2015⁹. Thus, allowing Defendants to avoid scrutiny of their blemished record of willful disregard of small business rights by invoking the AIA would only serve to reward the Defendants' apparent disdain for the law.

If Plaintiffs are deemed to be a prevailing party, they are also entitled to attorney's fees and costs pursuant to 5 U.S.C. §611(a)(5) and 28 U.S.C. §2412(d). Silver qualifies as a “party” as defined in the Equal Access to Justice Act, 28 U.S.C. §2412(d)(2)(B). Silver Decl. ¶2.

In addition, Plaintiffs request any other relief the court finds fair and equitable.

VI. CONCLUSION

For all the foregoing reasons, Plaintiffs respectfully request the Court to grant Plaintiffs' Motion for Summary Judgment and enter an order:

Date: May 15, 2020.

Respectfully submitted,

Lawrence Marc Zell (DC Bar # 959437)
Noam Schreiber, of counsel
ZELL & ASSOCIATES INTERNATIONAL ADVOCATES LLC
14 Penn Plaza
225 West 34^th Street, 9^th Floor
New York, New York 10122
E-mail: mzell@fandz.com

Counsel for Plaintiffs