Despite an avalanche of comments from all corners of the captive insurance industry criticizing Notice 2016-66 as unnecessarily burdensome, an affront to Congress, abusive and even downright vindictive (given the Service’s inability to win against captives in U.S. Tax Court), the Internal Revenue Service (IRS) has not altered course. The IRS’s reluctance to reconsider Notice 2016-66 has lead Ryan, LLC to join CIC Services, LLC as a plaintiff in filing a lawsuit against the IRS seeking an injunction and declaratory relief prohibiting enforcement of Notice 2016-66. Despite Congress affirming small captive insurance companies in the 2015 Path Act, Notice 2016-66 specifically targets small captive insurance companies, foisting burdensome and unnecessary reporting requirements on them. Almost all information the Service is requesting is already reported to the IRS in tax returns annually or otherwise available via its extensive audit program.
According to the suit filed:
The bases for the lawsuit are threefold. First, the IRS unlawfully issued Notice 2016-66, which qualifies as a “legislative-type rule,” without first complying with the mandatory notice-and-comment provisions of the Administrative Procedure Act (“APA”, 5 U.S.C. §553). Second, Notice 2016-66 is arbitrary and capricious and ultra vires in nature, lacking underlying authority and the reasoned-analysis footing required by the APA (5 U.S.C. §706(2)(A)). Third, Notice 2016-66 cannot “take effect” based upon the failure of the IRS to submit it to the Congress and the Comptroller General in accordance with the Congressional Review of Agency Rule-Making Act (“CRA,” 5 U.S.C. §801(a)(1)(A), et seq.)
CIC Services and Ryan are leading a coalition of captive managers and captive industry service providers. The Captive Insurance Defense Coalition was founded by Alex Webb, JD, chair of the North Carolina Captive Insurance Association’s (NCCIA) government affairs committee.
CIC Services originally filed suit against the IRS on 28 December, 2016, seeking an injunction from the federal district court to prohibit the enforcement of Notice 2016-66 which was issued by the IRS on November 1, 2016. The IRS extended the reporting deadline by 90 days, providing a window for comments to be received before filings were due (Initially, the notice had all filings due at the same time comments were due, suggesting the Service really had no interest in comments). The initial lawsuit was dropped after the IRS extended the reporting deadline to May 1.
CIC Services and Ryan filed a new lawsuit on Monday, March 27, 2017 in the US District Court for the Eastern District of Tennessee – CIC Services, LCC and Ryan, LLC vs. IRS et al. A date will now be set for a hearing with Kenneth A. Lazarus, JD of Washington, DC, the lead attorney for the Captive Insurance Defense Coalition. CIC Services is a captive manager, headquartered in Tennessee. Ryan is a broad-based accounting, consulting, and tax services corporation, which also manages captive insurance companies. Ryan is headquartered in Texas and has been a plaintiff against the IRS before, successfully challenging certain requirements of IRS Circular 230.