A ruling by the US District Court for the Eastern District of Tennessee has ordered for the Internal Revenue Service (IRS) to set aside Notice 2016-66 in its abiding suit against captive manager CIC Services. Judge Travis McDonough noted that the ruling was made on two grounds. Firstly, the IRS had failed to comply with requirements of the Administrative Procedures Act dictating that the agency must engage in notice and comment rulemaking to then examine the relevant underlying facts and data to support its decision to enforce the Notice. Secondly, the district court found that the IRS had failed to sufficiently justify its decision to observe micro captive transactions as potentially abusive. For the latter, McDonough ruled the IRS’ Notice to have “arbitrarily and capriciously” defined micro captives insurance arrangements as “transactions of interest” with the potential for tax avoidance or evasion. The ruling added: “[T]he administrative record fails to include relevant data and facts supporting the IRS’s decision to designate micro captive arrangements as transactions of interest, and, thus, reportable transactions.” In addition, the IRS was ordered to return all documents and information obtained pursuant to the Notice to the respective taxpayers and material advisors. Commenting on the ruling, CIC Services said: “Many in the captive insurance industry have long contended that the IRS is attempting, via an improper and illegal terror campaign, to render Internal Revenue Code Section 831(b) moot and effectively unusable. “Notice 2016-66 was just one means by which the IRS pursued this illegal purpose. Judge McDonough’s ruling that the burdens placed upon taxpayers and material advisors by virtue of the Notice had no rational justification in “data or facts” proves these contentions true.” CIC Services concluded: “It is essential that the IRS be held accountable for its repeated and continued instances of misconduct and that taxpayers be protected from future instances. Only Congress is capable of doing that.” McDonough previously issued a ruling temporarily forbidding the IRS from enforcing Notice 2016-66 against CIC Services in September 2021, pending this final resolution of the case. Before this, CIC Services saw another victory in the unanimous ruling of the US Supreme Court that the Anti-Injunction Act does not prevent federal courts from enjoining the IRS’s enforcement of illegal regulations.
