In what can only be described as good news for the captive insurance industry, the United States Supreme Court on May 4, 2020, agreed to hear an appeal in the CIC Services, LLC v. Internal Revenue Service case.
To recap the procedural history of the case, CIC sued the IRS in 2017, after the IRS issued Notice 2016-66, identifying so-called “micro-captive insurance” transactions as transactions of interest. This meant that taxpayers participating in a micro-captive insurance transaction were obligated to attach a Form 8886 to their tax returns for all years in which they participated in the transaction. This requirement extends to the captive, itself, and the insured, as well as the owners of the captive and the insured.
CIC alleged that the IRS had violated the Administrative Procedure Act (APA) when it issued Notice 2016-66 and sought a declaration that the Notice was unlawful and of no effect. The APA is the federal law that governs the manner in which a federal agency can issue rules and regulations. It generally requires an agency to provide advance notice of the rule or regulation, as well as an opportunity for public comment. The rule or regulation is initially issued in proposed form and does not become final until after the public comment period has expired. Often, the final rule or regulation will differ from the proposed rule or regulation based upon the public comments received by the agency. The IRS did not follow this procedure when it issued Notice 2016-66.
The IRS moved to dismiss CIC’s lawsuit based on the Anti-Injunction Act (AIA). The AIA is also a federal law. It precludes an action against the IRS seeking to enjoin the collection of any tax. The IRS took the position that the penalty that would be imposed against a taxpayer upon failure to file Form 8886 was a tax and that, as a result, CIC’s lawsuit was seeking to enjoin the collection of a tax in violation of the AIA.
CIC responded that the focus of its lawsuit was the disclosure obligation, not the penalty. It was not seeking to enjoin the collection of a tax, because no tax had yet been imposed. It also said that, if the court refused to hear its challenge to the Notice, a taxpayer’s only recourse for challenging the reporting obligation would be to not attach Form 8886 to its return, pay the penalty and sue for a refund. CIC claimed that this was fundamentally unfair.
Unfortunately, the District Court was not persuaded by CIC’s arguments and held that the AIA required the dismissal of CIC’s action. CIC appealed the dismissal of its lawsuit to the Sixth Circuit, which upheld the decision of the District Court in a 2-1 decision. The Sixth Circuit also denied CIC’s request for a rehearing en banc. CIC then filed a Petition for a Writ of Certiorari with the Supreme Court.
There are certain types of cases where Supreme Court review is mandatory. For example, if a state supreme court were to hold a federal law unconstitutional, appeal to the Supreme Court is automatic. A Petition for a Writ of Certiorari is the way that a party gets to the Supreme Court when the Court is not required to hear its case. The Supreme Court has unfettered discretion in deciding whether to grant a Petition for a Writ of Certiorari. And, it grants very few Petitions.
While no one can predict how the Supreme Court will ultimately resolve this case, the fact that it granted CIC’s Petition for a Writ of Certiorari is huge news for the captive insurance industry. If the Supreme Court were inclined to uphold the decision of the Sixth Circuit, there would be no reason to take the case. Even without Supreme Court review, the decision of the Sixth Circuit is already settled law; at least in the states within the circuit. It is reasonable to speculate that the Court – or at least the Justices who voted to hear the case – has something else in mind. It may be that the unfettered power of the IRS to indiscriminately wreak havoc on the captive insurance industry will finally be checked by a higher authority.