23 January 2020Law & regulation

CIC petitions US Supreme Court over IRS Notice 2016-66

CIC Services, a Tennessee-based captive manager, has petitioned the Supreme Court of the United States to hear its lawsuit against the IRS regarding IRS Notice 2016-66.

CIC Services has sought an injunction prohibiting the IRS from enforcing IRS Notice 2016-66 which was illegally promulgated in contravention of the Administrative Procedures Act. The notice designated certain types of captive insurance transactions as “transactions of interest”, imposing onerous filing obligations and record keeping requirements on them.

In August 2019, the Sixth Circuit denied CIC Services’ petition for en banc review by a nine-to-seven vote, citing the Anti-Injunction Act, a Civil War-era law prohibiting courts from restraining the assessment or collection of federal taxes.

CIC Services argues that law is irrelevant because it isn’t seeking to enjoin any tax, and is only contesting the illegal filing and record keeping requirements the notice imposes. Even one of the nine judges voting against CIC agreed with its position as a legal matter, CIC noted, but voted with the majority because he felt the case warranted a Supreme Court review.

The seven dissenting judges wrote an opinion in CIC Services’ favour following the court’s denial, and CIC said it has attracted increasing support from legal scholars. Villanova University School of Law professor Leslie Book wrote in the Procedurally Taxing blog that the opinions accompanying the denial of the request for en banc review provide a strong signal that the issue is headed to the Supreme Court.

CIC said it is also confident the Supreme Court will agree to hear its case. “Based on the Supreme Court’s nine-to-zero precedent in the Direct Marketing case, CIC Services expects to win if it does,” it said in a statement.

CIC Services’ principal and in-house counsel Sean King said CIC Services was committed to championing the cause, which he said was about more than one captive management company. “Administrative state overreach is a threat to all Americans, not just small and mid-market business owners,” he warned.

King had previously stated: “The issue at hand—that is, whether or not the IRS can, unlike any other federal agency, continue to systematically enforce obviously illegal regulations just because they are enforced by an illegal ‘penalty tax’—is much larger than just captive insurance or just Notice 2016-66. Indeed, it involves fundamental issues of liberty, fairness and separation of powers. For those reasons, CIC Services will continue to fight on behalf of taxpayers everywhere.”