Supreme Court: Microcaptive reporting challenge may go forward

By Paul Bonner

A lawsuit against the IRS’s requirement that taxpayers using certain microcaptive insurance arrangements and their material advisers must report the arrangement to the IRS is not barred by the Anti-Injunction Act and therefore may proceed, the Supreme Court ruled Monday.

In a unanimous decision, the Court in CIC Services, LLC, No. 19-930 (U.S. 5/17/21), reversed the Sixth Circuit, which had held that the lawsuit by CIC Services LLC against the IRS was barred by the Anti-Injunction Act (Sec. 7421(a)), which generally forbids lawsuits restraining the assessment or collection of any tax. Instead, plaintiffs (other than in the Tax Court) are generally required to first pay any contested tax and then sue for its refund.

In November 2016, the IRS in Notice 2016-66 declared certain microcaptive insurance transactions “transactions of interest,” making them “reportable transactions” with a potential for tax avoidance or evasion under Sec. 6707A. Taxpayers and their material advisers conducting a reportable transaction must provide specified information to the IRS describing it or face civil monetary penalties. A willful violation to comply can be punishable by criminal penalties under Sec. 7203 of up to one year in prison. (CIC Services is not known to have violated the notice, the Court stated.)

CIC Services sought an injunction against Notice 2016-66, claiming its promulgation violated the Administrative Procedure Act (APA), in that it was arbitrary and capricious by imposing new reporting requirements without demonstrated need and by the IRS’s not following prescribed procedures of notice and consent. The company estimated that the notice would cost it more than $60,000 annually.

In holding that the lawsuit was not barred by the Anti-Injunction Act, the Court distinguished between an injunction to restrain collection or assessment of a tax and one targeted, as in this case, at reporting requirements. Failure to comply with the notice could cause a taxpayer or adviser to be assessed a penalty, and that penalty would be deemed a tax for purposes of the Anti-Injunction Act under Sec. 6671. But, the Court said, such a “downstream tax penalty” does not trigger the Anti-Injunction Act.

“A reporting requirement is not a tax; and a suit brought to set aside such a rule is not one to enjoin a tax’s assessment or collection,” the Court said (slip op. at 6). CIC Services’ estimated compliance costs alone “could well exceed, or even dwarf,” any applicable tax penalties, the Court noted.

In fact, following the Anti-Injunction Act’s requirements of violating the notice and then suing to recover any penalty tax levied would “practically necessitate” a pre-enforcement, rather than a refund, suit. Possibly thereby exposing itself to criminal penalties “clinches the case,” the Court said.

The Court also doubted the government’s arguments that its distinction would open “floodgates” of taxpayers skirting the Anti-Injunction Act’s requirements by “artful pleading.”

The decision provides a glimmer of hope to taxpayers involved in microcaptive arrangements, Philip Garrett Panitz, J.D., author of “Captive Insurance: Avoiding the Risks,” JofA (June 2018), said Monday.

“The decision today is the first hint that the Supreme Court feels that the IRS has overstepped its boundaries with regard to microcaptives,” Panitz said. “But it is just a hint.”

The Court did not rule on the merits of any microcaptives or even on whether the IRS notice passes muster under the APA, Panitz noted.

“Therein lies the rub,” he said. “So back to square one CIC must go. This decision merely greenlights the right to challenge.”

Having found the suit to not be barred by the Anti-Injunction Act, the Court reversed the Sixth Circuit’s decision and remanded the case.

Paul Bonner ( is a JofA senior editor.

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