Immediate Halt of Requirement To Disclose 831(b) Transactions of Interest Denied by Court

A wooden gavel on top of several legal books

April 27, 2017 |

A wooden gavel on top of several legal books

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), seeking injunctive relief by setting aside IRS Notice 2016–66, as modified by IRS Notice 2017–06.

On April 21, the court issued an order on CIC’s and Ryan’s motion for preliminary injunction, denying their request to immediately halt the IRS from enforcing its rule regarding micro-captive transactions.

Significantly, in deciding the request for preliminary injunction, the Court held that the injunctive relief was not available dues to the Anti-Injunction Act.

In this case, the plaintiffs (CIC and Ryan) are unlikely to succeed on the merits of their claims because the court likely does not have subject-matter jurisdiction to issue the plaintiffs’ requested injunction. The Anti-Injunction Act (AIA) provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." 26 U.S.C. § 7421

In other words, CIC and Ryan cannot challenge via an injunction the IRS’s rule due to the Anti-Injunction Act.

However, this does not mean that CIC and Ryan will not ultimately prevail in the case. Indeed, the court appeared sympathetic to CIC’s and Ryan’s plight that it could not halt the rule from coming into effect through the use of an injunction.

While the court is sympathetic to the plaintiffs’ desire to challenge the IRS’s reporting requirements before they go into effect, the plaintiffs’ requested injunction necessarily operates as a challenge to both the reporting requirement and the penalty or tax imposed for failure to comply with the reporting requirement.

In summary, those micro-captives and advisors who meet the criteria for reporting transactions of interest under IRS Notice 2016–66 should do so by May 1, 2017, to avoid the penalties that may be imposed for failing to do so. For more information, see the article "Disclosure of 831(b) Transactions of Interest Required by IRS in Notice 2016–66."

April 27, 2017