The United States Supreme Court has agreed to hear CIC Services’ case against the Internal Revenue Service concerning Notice 2016-66 which targets micro captives.
The case, CIC Services, LLC v. Internal Revenue Services, challenges Notice 2016-66 that had compelled owners of certain 831(b) captive arrangements 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 March the IRS sent out approximately 150,000 letters to micro captive owners, asking for tax information and warning there was compliance activity happening in this area.
The letters were sent four days after the US declared the National Covid-19 Emergency Declaration, which the Self-Insurance Institute of America dubbed “insensitive and draconian”.
CIC Services has been fighting the IRS on 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.
It is this petition that the United States Supreme Court has agreed to hear.
Sean King, general counsel for CIC Services, said that the 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.”
