The District Court for the Eastern District of Tennessee has vacated IRS Notice 2016-66, which designated micro-captive insurance arrangements as “transactions of interest,” and thus reportable transactions.
The decision, in favor of CIC Services v. IRS, was issued by Judge Travis McDonough on March 21, 2022, and follows a victory by CIC in the U.S. Supreme Court on May 21, 2021. The issue, decided unanimously by the Supreme Court, was whether or not the IRS has a special privilege that’s not available to other government agencies to pass and enforce regulations without interference from any court.
In the Supreme Court case, the IRS had relied on the Anti-Injunction Act, a Civil War era law prohibiting federal courts from issuing injunctions that “restrain” the “assessment or collection of a tax.”
On remand, Judge McDonough vacated the notice on two grounds: first, that the notice was issued in contravention of the Administrative Procedures Act, without engaging in notice and comment rulemaking as required by law. And second, he ruled that the notice arbitrarily and capriciously designated certain types of captive insurance arrangements as “transactions of interest.”
To protect taxpayers from continued IRS misconduct related to Notice 2016-66, the judge ordered the agency to return all documents and information produced to it by taxpayers and material advisors pursuant to the notice, according to Sean King, founding principal and in-house counsel at CIC Services.
“While that step is much appreciated, the fact is that thousands of taxpayers who complied with the notice will never again see a dime of the tens to hundreds of thousands of dollars that each had to spend complying with the illegal notice, all while living under the threat of draconian penalties and even criminal sanctions,” he said.
