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Arbitrary and capricious action appropriate relief it should grant CIC
Besides holding that notice-and- Services. In its amended complaint, CIC The voluminous
comment procedures must be followed, Services asked the court to set aside
disclosure
the court also found that Notice Notice 2016-66, to enjoin all agencies
2016-66 was arbitrary and capricious from enforcing the notice and offering requirements create
under the APA. In Department of Com- documents produced by any individual
merce v. New York, 139 S. Ct. 2551 or entity in response to the notice in a substantial
(2019), the Supreme Court held that in judicial or administrative proceedings, time and reporting
determining whether an agency action and to require the IRS to destroy or
is arbitrary and capricious under the return materials produced in response requirement
APA, a court looks at whether an agency to the notice. The IRS argued that the for taxpayers.
examined the relevant data in making court should not set aside the notice and,
its decision and articulated a satisfactory instead, should leave it in place, pend-
explanation for it, including a rational ing the IRS’s promulgation of a new or Services was the only plaintiff in the
connection between the facts the agency amended rule. The IRS alternatively case and had not filed a class action, “the
found and the choice it made. argued that the court should limit its va- Court should not have ordered affirma-
In the case of Notice 2016-66, the cating of the notice to CIC and should tive injunctive relief that extends to non-
district court found that the IRS’s ad- not grant any of CIC’s requested injunc- party taxpayers and material advisors.”10
ministrative record showed no evidence tive relief. The court, however, refused CIC
that the IRS had examined relevant data The court granted some but not all of Services’ request to issue an injunc-
or articulated a satisfactory explanation CIC Services’ requested relief. The court tion to bar agencies from offering in
for listing microcaptives as reportable granted the company’s request that No- judicial or administrative proceedings
transactions. The IRS’s only rationale for tice 2016-66 be set aside in its entirety. any documents that had been produced
issuing the notice, according to its own While the court noted that the IRS in response to the notice. The court,
administrative record, was that the Ser- might be able to rectify the problems observing that Notice 2016-66 was only
vice “believed” there was the potential with Notice 2016-66 in promulgating one possible source for the documents
for tax avoidance or evasion in micro- a new rule, it concluded that nothing for the IRS, found that granting this
captive transactions, and consequently about the IRS’s actions supported leav- relief might prevent the IRS from using
these were transactions of interest that ing the notice in place while the Service for the public’s benefit documents that it
were reportable transactions. The court took the actions necessary to comply had lawfully acquired in the future and
found this explanation lacking because with the APA or vacating the notice as would in effect create future litigation
the IRS had provided no underlying to CIC only. In support of this conclu- over how and when the IRS received
data or facts to support the IRS position sion, it pointed to the Sixth Circuit’s documents in its possession. The court
that microcaptives have the potential for prior observations that the IRS did not appeared to be balancing the IRS’s need
tax avoidance or evasion. As a result, the have a great history of complying with for information that would benefit the
court concluded that besides not being APA procedures8 and that it does not Service in its investigative work on
promulgated according to APA notice- follow the “basic rules of administrative behalf of the public against the fact that
and-comment procedures, the notice was law.”9 the IRS had not followed proper admin-
also an arbitrary and capricious action of The court initially also held that istrative procedures.
the IRS. the IRS must return all documents
and information collected under the Broader implications
Requested remedies notice, including those collected from of CIC Services
Having determined that the IRS had nonparty taxpayers and material advisers. The district court’s decision in CIC
not followed the required APA notice- However, the court later narrowed its Services appears to remove the Form
and-comment procedures and that the order to exclude materials submitted by 8886 filing requirement for microcaptive
issuance of Notice 2016-66 was arbitrary nonparty taxpayers and material advisers. arrangements for taxpayers within its
and capricious, the court considered the The court explained that because CIC jurisdiction, but the IRS can continue

8. CIC Services, LLC, 925 F.3d 247, 258. 10. CIC Services, LLC, No. 3:17-cv-110 (E.D. Tenn. 6/2/22).
9. CIC Services, LLC, 936 F.3d 501, 507 (6th Cir. 2019).

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