Close Close

Regulation and Compliance > Federal Regulation > IRS

Supreme Court Hears Arguments in Captive Insurer Case

Your article was successfully shared with the contacts you provided.
U.S. Supreme Court in Washington. (Photo: J. Scott Applewhite/AP) U.S. Supreme Court (Photo: J. Scott Applewhite/AP)

The U.S. Supreme Court this week heard oral arguments in a micro captive insurer case that could affect how the Internal Revenue Service establishes rules that are not officially classified as regulations.

CIC Services LLC, the plaintiff, is a Knoxville, Tennessee-based company that helps business owners set up and run micro captives, or small insurance companies that serve only the captive owners.

IRS officials have argued for years that many micro captives help the owners lower taxes in abusive ways.

In 2016 the agency issued a batch of guidance that established tough new reporting rules for micro captives, or IRS Notice 2016-66. The notice requires micro captive owners and their advisors to report all micro captive transactions to the IRS.


  • Resources related to the CIC Services v. IRS case are available here.
  • An article about a U.S. Government Accountability Office report that refers to the CIC Services case is available here.

CIC sued, arguing that the IRS approach was arbitrary and capricious because the tax agency failed to put the new rules through a public notice and comment process.

The IRS has argued that CIC cannot bring its suit, because of the federal Anti-Injunction Act, which prohibits taxpayers from suing to block taxes. The IRS says the act also blocks taxpayers from suing over “unlawful regulatory mandates issued by administrative agencies that are not taxes.”

Supporters of the IRS position say that rejecting its ability to impose new reporting requirements through notices, without going through notice-and-comment periods, would gut the agency’s ability to respond quickly to scams and abusive tax shelters.

Justice Neil Gorsuch asked questions about the lack of a public comment period.

“Today, of course, the IRS regulates enormous swaths of the national economy, from our medical care to our pensions, to the entire nonprofit sector, a lot of the educational sector, child care,” Gorsuch said to Jonathan Bond, a federal government lawyer who was representing the IRS. “And some estimate that the IRS today fails to comply with notice-and-comment requirements of the [Administrative Procedure Act] about 40% of the time. Should we be concerned?”

Gorsuch suggested that the only way for taxpayers to exercise comment rights on the 2016 micro captive rules is from federal prison.

Justice Clarence Thomas expressed skepticism about the idea that a reporting requirement is the same as a tax.

“Normally, when you think of taxes, Mr. Bond, you think of a tax liability or a tax based on some business activity or income-generating activity, recordkeeping related to that activity,” Thomas said to Bond. “Where’s the income here and where’s the tax liability?”

Justices Elena Kagan and Sonia Sotomayor both questioned whether CIC Services is simply trying to get out of having to pay penalty which is really a tax, but Kagan appeared to express sympathy for CIC Services’ arguments.

The IRS demand for detailed reporting “is backed up not only by the tax penalty but also by a provision that allows criminal penalties, you know, put you in jail, fine you,” Kagan said. “So, why shouldn’t we understand that that’s an independent regulatory requirement, independent of the tax they’re objecting to?”

— Read IRS Warns Micro Captive Users of Imminent Shock and Aweon ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on FacebookLinkedIn and Twitter.