On 22 July his year, almost two dozen captive organisations filed a brief with the US Supreme Court. It was a landmark moment, the largest coalition of captive organisations to come together in this way.
Twenty captive organisations from a range of domiciles, as well as national organisations Captive Insurance Company Association (CICA) and the Self-Insurance Institute of America (SIIA), worked on and signed the brief.
The coalition of captive organisations involved include 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 U.S. Virgin Islands and Vermont.
The brief was filed in the CIC Services LLC vs IRS ‘CIC’ case, a long running court case in regard to the Internal Revenue Service’s (IRS) focus on micro captives.
The case, brought to court by captive manager CIC Services, challenges Notice 2016-66. The notice, originally published in 2016, had compelled owners of certain 831(b) captive arrangements (known as micro captives) to report details of their tax structure to the IRS.
The notice aims to identify “transactions of interest” to the IRS, which has been targeting micro captives because it believes that they could be used for tax evasion.
In previous years captives were listed as part of the ‘dirty dozen’, a list of the ‘tax scams’ that the IRS is focusing on. In 2020 captives were removed from the list, however the IRS is still looking very closely at the structures and has set up 12 new teams to focus on micro captives.
“Abusive micro-captives have been a threat to tax administration and a concern to the IRS for several years,” the IRS stated. “The IRS will continue to vigorously pursue those involved in these and other similar abusive transactions going forward. Enforcement activity in this area is being significantly increased.
“To that end, the IRS is deploying additional resources, which includes standing up 12 new examination teams comprised of employees from the IRS Large Business and International and Small Business/Self-Employed divisions that will be working to address these abusive transactions and open additional exams.”
CIC Services has been fighting the IRS on their approach to micro captives and Notice 2016-66 since it was first implemented almost four years ago.
The independent captive manager filed a lawsuit in 2016 concerning the notice’s implementation and sought an injunction from the federal district court to prohibit its enforcement.
The lawsuit was subsequently dropped, but the captive manager launched a new one in 2017 in the US District Court for the Eastern District of Tennessee.
CIC Services lost the lawsuit in 2017 meaning that the United States Court of Appeals for the Sixth Circuit denied its request to impose an injunction on the IRS.
Following this, CIC Services then decided to pursue an injunction delay in May 2019. However, the motion was denied.
In July 2019, CIC Services filed its petition against the denial of its Notice 2016-66 injunction, arguing that the court’s previous opinion “directly conflicts” with the text of the Anti-Injunction Act.
In May 2020 the Supreme Court agreed to hear the petition, and then in July the coalition of captive organisations submitted their brief regarding the case.
The coalition said in a statement that:
“This broad coalition formed with the goal of demonstrating through an amicus brief to the U.S. Supreme Court the broader concerns of the larger captive insurance industry with recent actions by the Internal Revenue Service (‘IRS’) and in support of the CIC Services case,” a statement from the group of associations said.
“While the industry continues to support 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 brief states that Notice 2016-66 has had a “chilling” effect on the captive insurance industry.
“Notice 2016-66 imposes a heavy burden on the public and causes ongoing irreparable harm to the captive insurance industry and its stakeholders,” the brief also says.
The brief makes a number of other arguments, including that the captive industry was not given a “meaningful opportunity” to participate in the making of Notice 66-2016, that it causes a heavy administrative burden for captive owners, and that the notice is “arbitrarily and capriciously” applied to all micro captives.
The coalition also acknowledges that there are some abusive transactions, but is in full support of efforts by the IRS to find those transactions and structures.
“The Amici offer no opinion on any other particular facts or structure of any insurance program at issue or otherwise, and fully support appropriate efforts by the IRS to curtail those transactions which are actually abusive that serve to undermine the industry,” the brief states.
Ryan Work, vice president of SIIA, said that the coalition of captive industry associations was “truly unique” and that it shows the common goal of all associations.
“This is an issue far beyond the captive industry, it’s an issue that impacts how federal agencies listen, respond and respect U.S. taxpayers,” he said.
“Through the coalition brief, those issues have now been raised by nearly two dozen captive associations who have expressed a unified voice to educate the highest court in the land, in addition to supporting businesses across the country who deserve a voice and appeals process before the IRS.”
SIIA has been very involved with the case and the campaign around it, writing to the IRS in March when the organisation sent letters to micro captive owners during the height of the Covid-19 pandemic.
On 20 March 2020 IRS sent approximately 150,000 letters to captive insurance companies who take 831(b) election, four days after the United States’ National Covid-19 Emergency Declaration.
The IRS letter stated that: “Several U.S. Tax Court decisions have confirmed that certain micro-captive arrangements are not eligible for claimed Federal tax benefits.
“We’re notifying you regarding IRS compliance activity in this area so you can make informed decisions about claiming tax deductions for micro-captive insurance premiums.”
SIIA took umbridge with the letters, and has written to the IRS asking them to revoke the letter and suspend audit activity until the National Covid-19 Emergency Declaration is withdrawn.
The letter, written by Work, criticises the IRS for sending the letters during the Covid-19 crisis and praises captive insurance companies for their work during the pandemic.
“Despite the malignant of enterprise risk captives, or ‘micro-captives,’ by the Internal Revenue Service (IRS), these same captive insurance companies are now being vindicated as they help numerous companies survive the Covid-19 crisis and beyond,” Work wrote in the letter.
“Due to the lack of insurance capacity in the commercial market, a significant portion of insurance risk has been placed in the captive market. There is little doubt that captives will be paying a significant number of claims to their insureds resulting from the current crisis.”
Work said that captive owners felt “astonishment and frustration” when they received the letter, especially given the IRS asked for information by 4 May 2020 or face the risk of audit.
“As if the IRS could not have done something more clearly insensitive, thoughtlessly timed or astonishingly draconian, the IRS Letter, itself, is so unclear that taxpayers making good faith efforts to comply could inadvertently put themselves in a position to be accused of perjury,” Work wrote to IRS secretary Steven Munchin and IRS Commissioner Charles Rettig.
Meanwhile, CIC Services has been very grateful for the support of the captive industry, and is confident that the Supreme Court will rule in their favour.
Sean King, general counsel for CIC Services, said that the captive manager’s case is essentially about if the IRS can enforce “illegal regulations” onto taxpayers
“Under the Anti-Injunction Act, courts are not permitted to restrain the IRS’s attempts to assess or collect taxes against taxpayers,” he said.
“The IRS interprets this to mean that it is free to issue even obviously illegal regulations and that by simply subjecting those taxpayers who fail to comply with that illegal rule to an also illegal ‘penalty tax’, courts are magically prohibited from enjoining enforcement of the illegal rule because doing so would have the effect of prohibiting the IRS from collecting the illegal penalty ‘tax’ from those who fail to comply.”
The IRS argues that what CIC Services wants would violate the Anti-Injunction act. However CIC Services believes that the IRS is enforcing an “illegal regulation” and exempting it from having judicial review.
King is confident that CIC Services will win the legal case, and says that it is a “constitutional problem”.
“The plain language of the Anti-Injunction Act does not lend itself to the IRS’s interpretation,” King said. “And reading it the IRS’s way creates an unnecessary constitutional problem. For that reason and others, we are confident of victory.”
Randy Sadler, managing partner and chief marketing officer, said that the case has significant to the entire industry and the general public, because it’s about state overreach and the constitution.
“Administrative state overreach is a threat to all Americans and to constitutional principles in general,” he said. “So this case has significance far beyond just the immediate issue at hand.”