Captive.com logo

Captive Insurance News

Free Report on Captive Insurance Trends 2017

Captive Insurance Issues and Trends 2017

A FREE 30-page special report courtesy of Captive.com

Dig deep into important issues and trends in captive insurance. Download this FREE special report featuring practical knowledge and insights from 11 respected captive insurance thought leaders!

Download FREE Report Now

"Notice 2016–66 Remains Intact" as Court Dismisses CIC and Ryan Lawsuit

tax wooden blocks with gavel SF
November 08, 2017

On November 2, 2017, just over 1 year to the day after the Internal Revenue Service (IRS) issued Notice 2016–66 (the notice), Judge Travis R. McDonough of US District Court for the Eastern District of Tennessee dismissed the CIC Services, LLC, and Ryan, LLC, lawsuit (CIC Servs., LLC v. IRS, 2017 U.S. Dist. LEXIS 181482 (E.D. Tenn. Nov. 2, 2017)) that sought to enjoin the IRS from enforcing the noticeThe court dismissed the entire lawsuit because it did not believe it had authority to issue an injunction.

To assist Captive.com readers, Chaz Lavelle, senior partner at Bingham Greenebaum Doll LLP, has created the following timeline of events leading up to and including the November 2 dismissal.

November 1, 2016

  • The IRS issued Notice 2016–66, designating as "transactions of interest" most captive insurance arrangements where the insurance company elects to be taxed under Internal Revenue Code § 831(b).
  • The notice required most participants in a transaction of interest to file a Form 8886; "material advisors" had to file a Form 8918.
  • Failing to file these forms resulted in substantial penalties, and the forms required substantial work to complete.
  • The IRS subsequently extended the due date for these forms to May 1, 2017.

 March 27, 2017

  • 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).
  • On April 21, 2017, Judge McDonough rejected the plaintiffs' requests for a preliminary injunction.
  • Accordingly, the participants and advisors filed the required forms by May 1. Nonetheless, additional forms are required for further participation or advice, so the lawsuit remained relevant.

November 2, 2017

  • In its November 2 opinion, the court described the plaintiffs' reasons for seeking to invalidate and to stop enforcement of the notice. The court said the plaintiffs assert as follows.

    • "[The notice] constitutes a 'legislative-type rule' that fails to comply with mandatory notice-and-comment requirements under the Administrative Procedures Act ('APA')...."
    • "[The notice] is 'arbitrary and capricious and ultra vires in nature.'"
    • "[The notice] fails to comply with the requirements of the Congressional Review of Agency Rule-Making Act, ... because the IRS failed to submit it to Congress and the Comptroller General."
  • The court dismissed the entire lawsuit because it believed that it did not have authority to issue an injunction.

According to Mr. Lavelle, the court's reasoning is highly technical, but the result is clear: Notice 2016–66 remains intact.
 
"The Anti-Injunction Act (AIA) and the Declaratory Judgment Act (DJA) work in tandem to prohibit someone from 'restraining the assessment and collection of any tax' by the IRS," Mr. Lavelle explained. "The court found that if one failed to comply with Notice 2016–66, a substantial penalty could be assessed."
 
He continued, "Accordingly, if the court invalidated Notice 2016–66, it would eliminate not only the filing requirements but also the collection of the penalty (which is treated like a tax for this purpose). This would be a violation of the AIA because it would restrain 'the assessment and collection of a tax'; accordingly, no injunction could be issued and the case was dismissed."
 
Mr. Lavelle added, "The court also rejected the plaintiffs’ additional arguments and new alternatives."

"While the decision is not surprising in light of the court's previous denial of our request for an injunction, it is still disappointing," said Sean King, founding principal and in-house counsel for CIC Services.

He pointed to an identical issue present in a recent ruling by the US District Court for the Western District of Texas in the Chamber of Commerce v. IRS case. Of this ruling, Mr. King said that "using the same legal reasoning articulated in our briefs, that court concluded that the Chamber of Commerce's lawsuit was not barred by the Anti-Injunction Act." 

Mr. King continued, "So, two different judges have examined the identical issue and came to contradictory conclusions. Unfortunately, we were on the losing side of one of those opinions."   

When asked about next steps, Mr. King advised, "We are considering our options."

Follow Captive.com on Twitter

Popular News Categories

Twitter Feed