Risk Management

Supreme Court Grants Certiorari in CIC Case

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.

Technical Memorandum

Family First Coronavirus Response Act [Technical Memorandum]

On March 18, 2020, President Trump signed into law the Family First Coronavirus Response Act (the “Act”).  The Act contains a number of provisions to provide relief during the Covid-19 crisis.

Here are some of the important features:

1. Emergency Paid Sick Leave Act

The Act provides up to two weeks of paid sick leave to all employees of employers with fewer than 500 employees.  The Act covers both full-time and part-time employees, although part-time employees may not be entitled to a full two weeks of paid leave.  Part-time employees are entitled to paid leave equal to the number of hours they work on average over a two-week period.

Paid leave under the Act is triggered by one of the following reasons:

  • An employee is subject to a federal, state or local quarantine order related to Covid-19.
  • An employee has been advised by a healthcare provider to self-quarantine as a result of exposure to Covid-19.
  • An employee is experiencing symptoms of Covid-19 and is seeking a medical diagnosis.
  • An employee is caring for an individual who is subject to a self-quarantine or isolation order or has been advised by a healthcare provider to self-quarantine.
  • An employee is caring for a child whose school has been closed.
  • An employee has any other qualifying condition under rules to be set forth by the Secretary of the Treasury or the Secretary of Labor.

The Act requires the Secretary of Labor to issue regulations to help employers calculate paid sick leave no later than April 2, 2020.  In addition, the amount of paid sick leave is capped.

2. Emergency Family and Medical Leave Expansion Act

The Act provides up to 12 weeks of Family and Medical Leave if an employee is unable to work because the school or day care facility for a child under the age of 18 has been closed or the child’s babysitter or nanny is unable to work as a result of a Covid-19 emergency declared by the federal, state or local government.  In order to be eligible, an employee must have worked for at least 30 days for the employer.  In addition, the first 10 days of leave may be unpaid.  The Act simply adds another reason an employee may take Family and Medical Leave.  It does not increase the amount of leave available to an employee beyond what is already available under current law.

3. Testing for the Coronavirus

The Act requires that health plans, whether group or individual, and whether fully-insured or self-insured, cover the entire cost of testing for Covid-19 at no cost to the employee.  This means that an employee may not be charged co-pays, deductibles or any other type of cost-sharing.  The testing may occur at a healthcare provider’s office, an urgent care center or an emergency room.  In addition, the Act covers telemedicine visits.  The employee need not obtain preauthorization.  The only requirement is that the testing be for Covid-19.

The Act only covers testing for Covid-19.  It does not include treatment for Covid-19.  However, there is nothing in the Act to prevent an employer or a health plan from covering the costs for treatment as well.

4. Tax Credits

The Act also includes tax credits to help an employer pay for the cost of paid sick leave and the expansion of Family and Medical Leave.

This legislation may just be the beginning.  As the crisis develops, Congress may enact other legislation to help Americans deal with the crisis.