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Coalition of Captive Industry Groups Files Amicus Brief in CIC Case

Lawyer working at a table with law books in the background
July 27, 2020

A coalition of 23 captive insurance industry associations has joined in filing an amicus brief before the US Supreme Court in the case of CIC Servs., LLC v. Internal Revenue Service, et al.

Earlier this year, the high court agreed to hear the appeal by CIC, a Knoxville, Tennessee–based captive manager, of the Internal Revenue Service's (IRS) position that micro-captives are "transactions of interest" that should be reported to the IRS. In 2019, a federal appeals court upheld a lower court ruling supporting the position of the IRS.

At issue are captive insurance companies electing to be taxed under § 831(b) of the Internal Revenue Code, which allows small insurance companies to pay federal income tax only on their investment income. IRS Notice 2016–66 states that certain transactions of such micro-captives made them transactions of interest, requiring them to report information. The IRS has aggressively investigated micro-captives in recent years, suggesting they could be used for purposes of tax evasion.

CIC argued that the IRS notice violated federal law and would require congressional review.

The coalition filing the friend of the court brief includes national, state, and territorial domicile captive industry associations. The group includes captive associations from Alabama, Arizona, Connecticut, Delaware, the District of Columbia, Georgia, Hawaii, Kentucky, Missouri, Montana, Nevada, New Jersey, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, Texas, Utah, the US Virgin Islands, and Vermont.

The coalition also includes the Captive Insurance Companies Association (CICA) and the Self-Insurance Institute of America, Inc. (SIIA).

In various statements, members of the coalition indicated that while the captive insurance industry supports appropriate IRS actions to curb abusive practices, it objects to the unnecessary regulatory burdens being imposed on taxpayers without a formal rulemaking or appeal process, contrary to law and congressional intent.

The amicus brief focuses on three core arguments.

  • The court should consider the heavy regulatory burden and harm being caused to taxpayers, namely the captive insurance industry. The IRS notice requires taxpayers to report duplicative information and imposes an undue financial burden on small- and medium-sized businesses, all for little to no benefit to the IRS. These requirements have come at a tremendous cost to taxpayers.
  • The Administrative Procedures Act (APA) requires federal agencies to allow for a meaningful opportunity for public comment on proposed rules. The industry brief argues that the IRS did not comply with the APA, rather issuing the notice without offering public comment and review. Despite the lack of a formal comment and review process, coalition members nonetheless provided comments to the IRS that went unheeded.
  • The coalition argues that the Anti-Injunction Act (AIA) prohibition on preventing challenges to the IRS should not extend to reporting requirements, such as are imposed by the notice.

In a statement, Kevin Doherty, president of the Tennessee Captive Insurance Association, said, "In filing this amicus brief with the US Supreme Court, we are joining with our industry colleagues across the country to demonstrate both the importance of captive insurance as a needed risk management tool for American business owners, as well as the unnecessary and overburdensome regulatory actions that stifle that growth and opportunity."

"CICA is proud to be part of this important industry coalition," CICA President Dan Towle said in a CICA statement regarding the coalition and its amicus brief. "In filing the amicus brief this coalition demonstrated a unified voice on an issue that placed a tremendous burden on captive insurance companies and illustrated the importance of captive insurance as a necessary and important risk management tool."

The Supreme Court will hear the CIC case during its session beginning in October.

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