US Supreme Court Hears Arguments in CIC Services Micro-Captive Case

Following oral arguments December 1, the US Supreme Court is expected to rule in March at the earliest on CIC Services LLC's challenge of the Internal Revenue Service (IRS) position that micro-captives are "transactions of interest" that should be reported to the IRS.

Following a 2019 federal appeals court ruling upholding a lower court finding that supported the position of the IRS, the Supreme Court decided earlier this year to take up the case, CIC Servs. LLC v. Internal Revenue Service.

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.

Knoxville, Tennessee-based captive manager CIC Services argued that the IRS notice violated federal law and would require congressional review.

According to a statement from the North Carolina Captive Insurance Association (NCCIA), one of the state captive groups that has supported CIC Services in its legal challenge of the IRS position, a Supreme Court ruling favoring CIC will likely result in a rehearing of the case by the original US District Court judge on CIC's right to an injunction against the IRS.

"We look forward to that eventuality and also to an opportunity to really engage with the IRS on meaningful guidance for our industry," the NCCIA statement said.