Two months ago, without any prior warning or public notice, the IRS issued Notice2016-66 which defined a number of common captive insurance transactions as
“transactions of interest.” The Notice
is limited to captive insurers organized under 831(b). The IRS states that these “transactions of
interest” have the “potential for tax avoidance or evasion.” It places reporting responsibilities on the captive
insurers and the owners of captive insurance companies, as well as a number of
other professions (including lawyers, accountants, actuaries, and captive
managers), with stiff monetary penalties for non-compliance.
The Notice has generated a substantial amount of reporting and commentary in
the captive insurance community. By imposing reporting requirements on any
831(b) which has used risk pools to achieve risk distribution, had loss rates
of less than 70%, or been involved in related-party lending, the Notice applies
to the vast majority of 831(b)s which have had operations for the last 10
years. Further, captives (and
professional advisors) were given only until January 30, 2017 to comply with
filing the new reporting requirements, which include retrospective reporting of
transactions for the last 10 years. However, since the time that this lawsuit was
filed, the IRS has issued 2017-08 which extends the reporting deadline until
May 1, 2017.
Two days ago, on December 28, 2016, CIC Services, LLC filed a lawsuit
against the Treasury Department and IRS. It seeks an injunction from the federal district court, which would
prohibit the IRS from enforcing the Notice.
More specifically, CIC Services, LLC is a captive manager located in
Tennessee.It claims it is entitled to an
injunction because (1) the Notice is a “legislative-type rule” which was
unlawfully issued without proper compliance with the Administrative Procedures
Act (which includes a public notice and comment period) and (2) because the
Notice is “arbitrary and capricious and ultra vires in nature” and lacks the
proper analytic foundation required under the Administrative Procedures Act.
The thrust of this injunctive lawsuit is that the APA contains a four step
process before an administrative rule can be put into place, and the Treasury Department
and IRS did not give public notice and seek public comment before publishing the
Notice.
It will be interested to see how this lawsuit proceeds in the federal court
system. If CIC Services, LLC prevails on a temporary restraining order or early
motion for a permanent injunction, the IRS will not be able to enforce the Notice.