U.S. Supreme Court Agrees to Hear Challenge to Scope of Anti-Injunction Act in Micro-Captive Insurance Company Transactions Case

This week, the U.S. Supreme Court agreed to hear a case of great consequence when it comes to judicial review of IRS guidance that arguably concerns tax collection or assessment. At issue in CIC Services LLC v. Internal Revenue Service is the scope of the Anti-Injunction Act and, more specifically, what constitutes the collection or assessment of taxes for purposes of the statute.

CIC Services LLC is a risk management consulting firm and material advisor to captive insurance companies. Its lawsuit relates to Notice 2016-16 issued by the Treasury Department and IRS, by which the federal government:

  • Identified certain transactions entered into between taxpayers and related captive insurance companies as having the potential for tax avoidance or evasion (micro-captive transactions);
  • Labeled micro-captive transactions as “transactions of interest;” and
  • Subjected micro-transactions to reporting requirements and potential penalties associated with “reportable transactions.”

In a nutshell, Notice 2016-16 served to label micro-captive transactions as potentially abusive tax shelters, much to the chagrin of CIC Services. In response, the company filed its complaint against the IRS in the United States District Court for the Eastern District of Tennessee, seeking to render Notice 2016-16 and its mandates invalid. CIC Services alleged that in issuing the notice, the IRS failed to follow the requisite notice-and-comment rulemaking and congressional review procedure for legislative rules as set forth in the Administrative Procedure Act.

The trial court dismissed CIC Services’ complaint for lack of subject matter jurisdiction, holding that the Anti-Injunction Act divested it of jurisdiction because the lawsuit was “for the purpose of restraining the assessment or collection of any tax.” CIC Services appealed this ruling to the Sixth Circuit, arguing that the Anti-Injunction Act did not prohibit pre-enforcement review of Notice 2016-16 because it is not geared toward tax collection or assessment; rather, the Administrative Procedure Act compels such a review.

For its part, the IRS contended that compelling taxpayers to report on the use of potentially questionable tax shelters (read: micro-captive transactions) is (and was) related to tax collection and therefore protected by the Anti-Injunction Act. The Sixth Circuit agreed, finding that the Anti-Injunction Act barred CIC Services’ litigation.

By way of certiorari, the U.S. Supreme Court has stepped in and is set to hear CIC Services LLC v. Internal Revenue Service during its October 2020 term. Michelman & Robinson will be sure to follow this interesting case and convey the High Court’s decision.

This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.