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.