A federal judge has issued a ruling temporarily forbidding the Internal Revenue Service (IRS) from enforcing Notice 2016-66 against CIC Services, pending final resolution of the case.
CIC Services says the ruling by District Judge Travis McDonough is in part supported by the “irreparable harm by virtue” faced as a result of the notice, as material advisors no longer refer clients to the captive manager for fear of being subjected to the requirements of the notice.
Sean King, general counsel for CIC Services, notes: “This is one of the few times in history that the IRS has been preemptively enjoined from enforcing an illegal regulation.”
He adds: “At this moment we believe CIC Services to be the only entity in the country that is exempted from the requirements of IRS Notice 2016-66, which we contend was issued illegally, arbitrarily and capriciously. But we are not satisfied with that, and we will not rest until the court instructs the IRS that it cannot enforce the Notice against any taxpayer or material advisor.”
This follows a significant unanimous ruling by the Supreme Court in May in favour of CIC Services, which determined that the Anti-Injunction Act does not prevent federal courts enjoining the IRS’ enforcement of illegal regulations when the regulations establish affirmative reporting requirements.
CIC Services notes that the COVID-19 pandemic has demonstrated the advantages of captive structures for small- and mid-market business owners in accessing the capital and credit markets of multinational enterprises.
It is estimated that captives managed by CIC Services have paid up to US$15 million of COVID-related claims alone.
While waiting for ultimate resolution of the case, CIC Services says it expected other material advisors — and potentially even taxpayers — to petition other courts for similar reprieve from the notice.
