Judge Vacates Illegal Notice 2016-66 in CIC Services, LLC v. IRS

KNOXVILLE, Tenn., March 28, 2022 /PRNewswire/ -- Following its 2021 United States Supreme Court victory over the Internal Revenue Service (IRS), CIC Services, LLC has achieved another win benefiting taxpayers and their material advisors.

On March 21, 2022, Judge Travis McDonough of the United States District Court Eastern District of Tennessee issued a ruling vacating IRS Notice 2016-66 (the "Notice") on two grounds. First, he ruled that the Notice was issued in contravention of the Administrative Procedures Act—without first engaging in Notice and Comment rulemaking as required by law. And second, he ruled that the Notice arbitrarily and capriciously designated certain types of captive insurance arrangements as "transactions of interest." 

According to McDonough, the IRS had no underlying facts and data showing that micro-captive insurance arrangements have a potential for tax avoidance or evasion. "The administrative record fails to include relevant data and facts supporting the IRS's decision to designate micro-captive arrangements as transactions of interest, and, thus, reportable transactions," said the judge. 

CIC Services Founding Principal and In-House Counsel Sean King, who spearheaded the case, has long lamented the IRS's illegal tactics. "For years the IRS has tried to accomplish, through a campaign of terror, what it has been entirely unable to accomplish via the courts, in Congress or by following legally-required notice and comment rulemaking practices—that is, to render Internal Revenue Code Section 831(b), which was the target of the Notice, moot and effectively unusable," said King. "Notice 2016-66 was just one means the IRS pursued for this illegal purpose. Judge McDonough's ruling that the burdens placed upon taxpayers and material advisors by virtue of the Notice had no rational justification in data or facts finally proves my contentions to be true."

To protect taxpayers from continued IRS misconduct related to this Notice, the judge ordered the IRS to return all documents and information produced to the IRS by taxpayers and material advisors pursuant to Notice 2016-66.

"While that step is much appreciated, the fact is that thousands of taxpayers who complied with the Notice will never again see a dime of the tens to hundreds of thousands of dollars that each had to spend complying with the illegal Notice, all while living under the threat of draconian penalties and even criminal sanctions noncompliance," said King.

The judge's ruling that the IRS acted illegally comes at a time when the IRS is pressing Congress for more funding and more power. However, given the IRS's history of disregarding laws, King says Congress should deny these requests for additional funding and power or, at a minimum, ensure that they are accompanied by sufficient taxpayer protections. 

"It is essential that the IRS be held accountable for its repeated and continued instances of misconduct and that taxpayers be protected in the future," said King. "Only Congress is capable of doing that."

Taxpayers or material advisors who suffered losses because of forced compliance with Notice 2016-66 are encouraged to voice their displeasure to Congress. A specimen letter can be downloaded here.

SOURCE CIC Services, LLC