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CIC Services and Ryan File Suit Against IRS over Notice 2016–66

"Internal Revenue Service" letters on white stone
April 04, 2017

On November 1, 2016, the Internal Revenue Service (IRS) published Notice 2016–66, indicating that certain transactions of captive insurance companies making elections under Internal Revenue Code (IRC) § 831(b) to be subject to federal income tax only on their investment income are "transactions of interest." It initially required these transactions of interest to be reported to the IRS as "reportable transactions" by January 30, 2017, but that date was subsequently extended by IRS Notice 2017–06 to May 1.

On March 27, CIC Services, LLC, and Ryan, LLC, filed suit against the IRS in US District Court for the Eastern District of Tennessee (Ryan et al. v. IRS et al., case number 3:17–cv–00). CIS Services and Ryan provide captive management services to their clients. Their lawsuit is seeking injunctive relief by setting aside IRS Notice 2016–66, as modified by IRS Notice 2017–06.

The plaintiffs claim three bases for the lawsuit.

First, the IRS unlawfully issued Notice 2016–66, which qualifies as a 'legislative-type rule,' without first complying with the mandatory notice-and-comment provisions of the Administrative Procedure Act ('APA,' 5 U.S.C. § 553). Second, Notice 2016–66 is arbitrary and capricious and ultra vires in nature, lacking underlying authority and the reasoned-analysis footing required by the APA (5 U.S.C. § 706(2)(A)). Third, Notice 2016–66 cannot 'take effect' based upon the failure of the IRS to submit it to the Congress and the Comptroller General in accordance with the Congressional Review of Agency Rule-Making.

Among other allegations, Ryan and CIC Services state 'The IRS has tar-brushed all § 831(b) captives (and their related entities) by including them in its ‘Dirty Dozen’ list of 'Tax Scams,' implying the existence of widespread and egregious taxpayer abuse, scams, fraud, and the like and tainting legitimate captive managers like the Plaintiffs as ‘promoters’ of ‘tax avoidance schemes.’”

The outcome of this case will be interesting to see. However, with the May 1 deadline looming only weeks away, those who own or service 831(b) captives would not be wise to delay their preparations of the required disclosures while waiting on it. 

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