CIC Services wins latest microcaptive battle with IRS

23-09-2021

CIC Services wins latest microcaptive battle with IRS

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A federal judge has blocked the US Inland Revenue Service (IRS) from enforcing guidance that penalizes nondisclosure of microcaptive insurance arrangements by advisory firm CIC Services LLC.  The IRS must await the outcome of a suit by CIC contending that the guidance violated administrative law, said District Judge Travis R. McDonough.

According to the judge for Eastern District of Tennessee, CIC had shown it was likely to prevail in its suit, and he therefore imposed a preliminary injunction barring the IRS from enforcing the requirements laid out in its Notice 2016-66. The notice concerned microcaptives, taxed only on investment income, and labelled such arrangements as potentially abusive, so requiring their disclosure under threat of penalties.

“CIC has demonstrated that it is likely to succeed on its claim that Notice 2016-66 constitutes a legislative rule and that it is invalid because the secretary failed to comply with required notice-and-comment procedures under the APA," said Judge McDonough.

It’s the latest in the long legal battle. In November 2017, the Tennessee federal court found the case was barred by the Anti-Injunction Act, which prohibits suits that could restrain tax collection. A split Sixth Circuit affirmed that decision. 

In May, however, the Supreme Court determined that CIC Services’ suit targeted Notice 2016-66, not potential tax collection, and sent the case back to the lower court. The government’s attempt to reverse that finding has now failed.

The judge found significant fault with the IRS’s determination that microcaptive insurance arrangements were "transactions of interest” that should be reported – a definition, he said, that was “nebulously defined”. 

“Effectively, a ‘transaction of interest’ is any transaction the IRS believes is the same or similar to any other transaction it has previously deemed a transaction of interest. Such a circular definition amounts to a catch-all that seemingly grants the IRS unlimited discretion to label any transaction a ‘transaction of interest,’ and, thus, a ‘reportable transaction,’ if it believes the transaction has the potential for tax avoidance or evasion.,” said McDonough.

Kenneth Lazarus of Lazarus & Associates, representing CIC Services, told website Law360 he was “pleased and thankful” for the interim relief and “anxious to get on with the pursuit of further relief in the case”.

CIC Services, IRS, Microcaptives, Lawsuit, Insurance, Reinsurance, Judge Travis R. McDonough, Kenneth Lazarus, North America

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