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Eastern District Court of Eastern Tenn. Strikes Down IRS Notice 2016-66

by Alan Fine
March 24, 2022

In a significant win for the captive insurance industry, the Eastern District Court of Tennessee ruled that the IRS improperly subverted the Administration Procedures Act, and that in doing so their actions were arbitrary and capricious (CIC Services, LLC v. Internal Revenue Service). The federal judge ordered Notice 2016-66 to be completely invalidated for all taxpayers and participants. The court also ordered the IRS to return all the information and materials received under the Notice to taxpayers and material advisors.

As a reminder, Notice 2016-66 made the Section 831(b) captive transaction a “transaction of interest,” which required taxpayers and material advisors to disclose a host of items to the IRS and the Office of Tax Shelter Administration on Form 8886. This ruling is a big step forward for the captive industry, resulting in significantly less scrutiny and fewer filing requirements for captives, as well as a reprieve as the IRS is not able to use the documents they have collected to date.

Case Background

In May 2021, the Supreme Court ruled that CIC Services was entitled to a trial on the merits of whether the IRS appropriately issued Notice 2016-66. In September 2021, the District Court granted CIC’s request for preliminary injunction, prohibiting the IRS from enforcing the Notice against CIC. CIC subsequently asked the court to enjoin the IRS’s enforcement against all taxpayers and material advisors.

CIC accused the IRS of spreading “fear, uncertainty and doubt” in the captive insurance industry and said that the agency failed to distinguish between legitimate and abusive captive arrangements. In the recent decision, Judge McDonough noted that the Sixth Circuit Court had rejected the government’s contention that the Notice wasn’t required to go through notice-and-comment procedures under the Administration Procedures Act and was essentially similar to a legislative rule that built on current law.

It remains to be seen how the IRS will react to this decision, but as of now the ruling is a significant win for captive supporters.

For assistance or questions about what this means for your tax filing, contact our experts.

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