CIC Services seeks injunction against IRS Notice enforcement

Captive manager CIC Services has again asked a Tennessee court for injunctive relief to prohibit the Internal Revenue Service (IRS) from enforcing CIC’s compliance with Notice 2016-66.

Earlier this year, the US Supreme Court sided with CIC, which had challenged the legality of Notice 2016-66 under the Administrative Procedure Act (APA). The APA sets out the processes that agencies must follow when promulgating regulations.

This cleared the way for the trial court to rule on whether Notice 2016-66—which requires information reporting for certain participants and material advisors of micro-captive transactions—is illegal and whether it should be enjoined.

CIC had challenged the lawfulness of Notice 2016-66 under the APA before the US District Court for the Eastern District of Tennessee in March 2017, asking the court to invalidate and restrain the enforcement of Notice 2016-66.

However, the Tennessee court dismissed the action on the basis that it would be barred by the Anti-Injunction Act (AIA), as under the AIA “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person”.

A divided panel of the US Court of Appeals for the Sixth Circuit affirmed the lower court’s decision and denied a request for review, prompting CIC to appeal to the Supreme Court.

At the Supreme Court level, the court held that the AIA didn’t preclude CIC’s suit, before remanding the case to the Sixth Circuit.

The mandate was returned to the Tennessee court on June 29, 2021. Two weeks later, the court established a briefing schedule for additions to the record and cross motions for summary judgment, concluding on December 3, 2021.

However, the IRS then filed a motion for extension of time, seeking to extend the schedule into 2022.

In its filing earlier this week, CIC said that on June 8, 2020—days after the Supreme Court granted certiorari—the IRS notified CIC Services that it was under audit as a potential abusive tax shelter promoter.

“The IRS has subsequently claimed that this is simply a coincidence and not obvious retaliation, but despite demand, it has refused to provide written proof establishing its claim. Simply put, the IRS is playing for keeps,” alleged CIC.

It warned that, given the current schedule, it will likely be at least another year before an opportunity for final relief arises.

“Yet, as the Supreme Court made clear, CIC Services and its clients currently live under threat of federal prison and crippling fines from the IRS should it deign to impose them—all because of a pseudo-regulation that is most certainly invalid,” said the filing.

CIC has asked the court to set a hearing on its motion to grant a preliminary injunction at its earliest convenience.

Sean King, founding principal and in-house counsel at CIC, said: “For nearly five years the captive insurance industry has suffered under the illegally-issued and improperly-enforced IRS Notice 2016-66.

“We look forward to the day, hopefully very soon, when the US District Court will prohibit the IRS’s further enforcement of that illegal rule and thereby force the IRS to comply with the same rule-making standards as every other federal agency.”

The IRS has declined to comment.