Supreme Court permits challenge to IRS information reporting notice

May 19, 2021
May 19, 2021
0 min. read

In CIC Services, LLC v. Internal Revenue Service, No.19-930 (S. Ct. May 17, 2021)  the United States Supreme Court unanimously ruled that the Anti-Injunction Act does not bar a lawsuit seeking to set aside Notice 2016-66 information-reporting requirements relating to micro-captive insurance transactions. The complaint alleged that the IRS violated the Administrative Procedure Act (APA) by issuing the notice without ‘notice-and-comment’ procedures and that it was arbitrary and capricious because the notice imposed new reporting requirements without proven need. The court held the information-reporting requirement is not a tax, and therefore the Anti-Injunction Act does not prohibit the suit because it is not seeking to restrain the assessment or collection of any tax. Accordingly, the court reversed and remanded the case for further proceedings consistent with its opinion.

CIC Services, LLC is a material advisor to taxpayers participating in micro-captive transactions. A micro-captive transaction is typically an insurance agreement between a parent company and a ‘captive’ insurer under its control. The Code provides the parties to such an agreement with tax advantages. The insured party can deduct its premium payments as business expenses under section 162(a) and the insurer can exclude up to $2.2 million of those premiums from its own taxable income under section 831(b). As a result, the government does not tax any of the money involved in the transaction. 

The IRS determined that taxpayers must report so-called micro-captive transactions because of their potential for tax evasion. The IRS has broad power under section 6011(a) to require the submission of tax-related information that it deems helpful in assessing and collecting taxes. Under section 6111(a) and (b)(1)(A), the reporting requirements may apply not just to taxpayers, but also to “material advisors”— individuals or entities that earn income from providing taxpayers with certain kinds of “aid, assistance, or advice.” Section 6707A(c)(1) imposes a requirement that taxpayers and material advisors provide information about what the Internal Revenue Code calls ‘reportable transaction[s].’ 

Pursuant to this authority, the IRS issued Notice 2016-66 (since modified by Notice 2017-08), designating micro-captive insurance transactions as reportable ‘transactions of interest’ for purposes of Treas. Reg. section 1.6011-4. The notice requires that taxpayers who enter into micro-captive transactions, and material advisers who advise on micro-captive transactions, file disclosure statements with the IRS Office of Tax Shelter Analysis. Taxpayers and material advisors associated with such an agreement are required, among other things, to “describe the transaction in sufficient detail for the IRS to be able to understand [its] tax structure.”

Failures to comply with the reporting requirements specified in Notice 2016-66 are punishable by civil and criminal penalties. These include civil monetary penalties of $50,000 for advisors and up to that amount (depending on the amount of tax gain realized) for taxpayers. Refer to sections 6707(b), 6707A(b). In addition, an advisor may incur a daily penalty of $10,000 for failing to furnish, on request, a list of the people he or she advised on a reportable transaction. Refer to sections 6708(a), 6112(a). Under section 6671(a), such penalties are deemed to be tax[es] for purposes of the Internal Revenue Code— including the Anti-Injunction Act. Under the Code, any person who “willfully” breaches an IRS reporting requirement is also subject to criminal penalties of section 7203. Such criminal violation is a misdemeanor, punishable by fines and up to one year in prison. The criminal fine under section 7203, however, is not deemed to be a tax under section 6671(a).

The IRS had argued that because the reporting requirements are enforceable through civil and criminal penalties, the Anti-Injunction Act prohibited the suit. The Anti-Injunction Act, codified in section 7421(a), provides that “[N]o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person.” Because of the Act, a person can typically challenge a federal tax only after he or she pays it, by suing for a refund. Refer to National Federation of Independent Business v. Sebelius, 567 U. S. 519, 543 (2012)

However, as today’s opinion points out, a reporting requirement is not a tax, and thus a suit brought to set aside an IRS Notice that imposes a reporting requirement does not  enjoin  tax assessment or collection. That is so even if the reporting rule will help the IRS bring in future tax revenue. Information gathering is a phase of tax administration that occurs before assessment or collection. 


The Supreme Court decision may embolden advisors to challenge other IRS Notices that require reporting of certain transactions. Notice 2017-10, which requires taxpayers to report syndicated conservation easement donations, is an example of such a Notice. In addition, this decision may impact the IRS’s ability to issue listing notices without following the ‘notice-and-comment’ procedures of the Administrative Procedures Act.

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