United States

Case for injunction against micro captive disclosures dismissed

District Court dismisses CIC Services, LLC and Ryan, LLC case


A Tennessee district court recently granted the IRS’s motion to dismiss a case brought against it by two managers of captive insurance companies disputing the validity of disclosure rules required under Notice 2016-66. CIC Services, LLC and Ryan, LLC v. IRS et al., Case No. 3:17-cv-110 (E.D.Tenn. Nov. 2, 2017). The court dismissed the case finding that the court lacks the subject matter jurisdiction over the claims because they are barred by the Anti-Injunction Act (“AIA”) and the tax exception to the Declaratory Judgment Act (“DJA”).

Notice 2016-66

On Nov. 1, 2016, the IRS issued Notice 2016-66, modified by Notice 2017-08, designating micro-captive insurance transactions as transactions of interest for the purposes of Reg. §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. (Prior alert on Notice 2016-66.)


In their complaint, CIC Services, LLC (“CIC”) and Ryan, LLC (“Ryan”) (together “plaintiffs”), allege that as two captive insurance managers they are subject to Notice 2016-66’s disclosure requirements as material advisors and that complying with such requirements would force them to incur significant costs. CIC and Ryan argue that the notice is a “legislative-type rule” that does not comply with the notification and comment requirements under the Administrative Procedures Act, and that the notice is arbitrary and capricious. Further, plaintiffs allege that the notice does not comply with the requirements of the Congressional Review of Agency Rule-Making Act because it was not submitted to Congress. As such, CIC and Ryan request that the court declare that the notice is invalid under the DJA and enjoin the IRS from enforcing the notice’s disclosure requirements. The IRS moved to dismiss the case asserting that that court lacks subject matter jurisdiction.

The IRS moved to dismiss the complaint arguing that under the AIA and the tax exemption to the DJA the court lacks the subject matter jurisdiction over the plaintiffs’ claim. The AIA prevents a court from hearing an injunction suit where the sought after injunction is for the purpose of restraining the assessment or collection of any tax. The DJA allows a court to declare rights of an interested party seeking a declaration, but has an exception for declarations with respect to Federal taxes.

The court first reviewed the standard of law it uses to review cases where subject matter jurisdiction is argued. The court determined that the IRS’s motion to dismiss was a challenge to the sufficiency of CIC and Ryan’s pleading and, as such, the court must take the plaintiffs’ allegations as true for purposes of ruling on the motion to dismiss.

However, the District Court agreed with the IRS and dismissed the captive insurance managers’ complaint. In reaching its decision, the court held that although the notice provides that a person who fails to comply with the disclosure requirements will be subject to a penalty, that penalty, falling under specific code sections, is considered a tax within the AIA’s prohibition against injunctive relief. Ultimately, the court decided that the plaintiffs’ claims and the requested injunctive relief would operate as a, “challenge to both the reporting requirement and the penalty or tax imposed for failure to comply with the reporting requirement.” As such, the court held that it lacks the subject matter jurisdiction over the claims because they are barred by the AIA and the tax exception to the DJA.


Taxpayers and their advisors both have been affected by Notice 2016-66’s disclosure requirements. In this case, the court avers that the two captive insurance managers have an adequate alternative to challenge the IRS’s position, that being the payment of the penalty followed by initiating a refund suit. However, by dismissing this case for subject matter jurisdiction, the court is effectively closing off the matter for litigation prior to paying the penalty. Although the case may be appealed, taxpayers should consult their tax advisors to ensure that they are meeting the IRS’s requirements and are aware of the risks of noncompliance.


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