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A federal court on Tuesday granted a preliminary injunction in favor of a captive management company that alleged the IRS was overstepping its authority in imposing a reporting requirement on microcaptives without first submitting it for congressional review.
The ruling follows a U.S. Supreme Court ruling in the case, which also went in favor of the captive manager.
In CIC Services LLC v. Internal Revenue Service, Knoxville, Tennessee-based CIC Services sued to stop an IRS reporting requirement for microcaptives, which are often known as 831(b) captives.
The IRS has been investigating microcaptives for several years and has won several cases where it alleges the vehicles are used by wealthy families to avoid taxes. As part of its investigations, in 2016 it imposed rigorous reporting requirements on captive managers, which included stiff penalties for noncompliance.
CIC sued the IRS saying that requirements would cost more than $60,000 a year to comply with and could not be imposed without going through a “notice-and-comment” rulemaking process. The IRS argued the suit was barred by federal law but after a lower court ruling in the IRS’s favor, the Supreme Court allowed the suit to proceed and it was returned to the U.S. District Court for the Eastern District of Tennessee in Knoxville.
In its ruling on Tuesday, the district court said the key issue in the case was whether the IRS reporting requirement was a legislative rule, which is subject to review, or an interpretive rule, which is not.
“CIC has demonstrated that it is likely to succeed on its claim that Notice 2016-66 constitutes a legislative rule and that it is invalid because the Secretary failed to comply with required notice-and-comment procedures,” the court ruled.
The IRS did not immediately return a call seeking comment.
The IRS on Friday urged participants in “abusive” microcaptive insurance arrangements to exit the programs and warned that it would issue penalties against such captive owners.