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he CIC Services1 decision recently As background, the Service has authority
under the American Jobs Creation
T handed down by a federal district The court
court in Tennessee has drawn the atten- explained that Act of 20042 to collect information
about potential tax shelters and impose
tion of those involved in microcaptive civil and criminal penalties upon
insurance transactions, other taxpayers the IRS’s taxpayers failing to disclose reportable
administrative
engaged in reportable transactions, transactions. Although Congress
record showed
and administrative law watchers. The instructed the IRS to define reportable
business that brought the lawsuit, CIC no evidence transactions “under regulations,” the IRS
Services, an adviser and manager of began to issue subregulatory guidance
via IRS notices. In Notice 2016-66,
microcaptive insurance transactions, that the IRS had the Service announced that Sec. 831(b)
examined relevant
had previously secured a U.S. Supreme microcaptive insurance transactions
Court victory in which the Court held data or articulated substantially similar to the transaction
a satisfactory
that the company’s suit was not pre- described in the notice would be
cluded by the Anti-Injunction Act. On explanation for classified as transactions of interest that
remand to district court, CIC Services are reportable transactions requiring
disclosure under Regs. Sec. 1.6011-4
now has another win — this time with listing microcaptives and Secs. 6011 and 6012.
as reportable
the court invalidating Notice 2016-66,
transactions.
which classifies certain microcaptive CIC Services case
arrangements as reportable transactions. CIC Services, a Tennessee-based
captive insurance manager and
This article examines the possibly
company can exclude from taxable material adviser to taxpayers that
far-reaching implications of the federal
income up to $2.45 million of premium participate in microcaptive transactions,
district court’s March 2022 holding.
payments per year by electing under Sec. challenged Notice 2016-66 in district
Before delving into the decision and its 831(b) to be taxed only on its invest- court. It argued the IRS violated the
broader repercussions, however, it may ment income. As a result, the insured Administrative Procedure Act (APA) in
be helpful to review what microcaptive party can take a deduction and there is promulgating the notice and requested
no corresponding tax on the captive in- that the court hold that the notice is
insurance arrangements are, the IRS’s
surer. These small insurance companies invalid. Specifically, CIC Services argued
efforts to crack down on their abuse,
are referred to as “micro” captives. the notice violated the APA in two ways:
and the prior developments in the CIC
If these arrangements are used for (1) It was arbitrary and capricious, and
Services litigation. real insurance purposes, the Code per- (2) the IRS failed to engage in standard
mits them. However, the arrangements notice-and-comment rulemaking as
Microcaptive insurance set up by business owners (often on required by the APA.
companies the advice of unscrupulous promoters Rather than address the APA claims,
To protect against certain risks, businesses or advisers), frequently lack the true the IRS initially fought the case by
can create “captive” insurance companies attributes of insurance, for example, by arguing that the suit was blocked by
that are typically owned by the business’s insuring implausible risks, failing to ad- the Anti-Injunction Act (Sec. 7421)
owners or family members. There are tax dress genuine business needs, duplicat- — a law originally enacted in 1867
advantages to this arrangement because ing the business’s commercial insurance that prevents taxpayers from stopping
the insured party can deduct the premium coverage, or charging excessively high the IRS from assessing and collecting
payments as a business expense. In addi- “premiums.” taxes. The district court for the Eastern
tion, under a provision in the Code that To help curb microcaptive insurance District of Tennessee agreed with the
benefits small insurers, the insurance abuses, the IRS issued Notice 2016-66. IRS that CIC Service’s claims were

1. CIC Services, LLC, No. 3:17-cv-110 (E.D. Tenn. 3/21/22), modified on 2. American Jobs Creation Act of 2004, P.L. 108-357.
rehearing (6/2/22).

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