I’ve previously written about the attempt by captive manager CIC Services, LLC, and accounting firm Ryan, LLC, to stop the application of IRS Notice 2016-66 because that Notice would have the effect of warning CIC’s and Ryan’s clients that they might have been involved in abusive tax shelters through their participation in risk-pooled 831(b) captive insurance companies. In my article, Court Pours Out Lawsuit By CIC Services, LLC, And Ryan, LLC, To Stop Notice 2016-66, I discussed how the U.S. District Court for the Eastern District of Tennessee had given CIC and Ryan the thumbs-down in their efforts to stop the IRS.
The Ryan folks apparently saw the futility of continuing the litigation against the IRS, not to mention that they were creating the impression of being desperate to stop Notice 2016-66 because maybe things were not so kosher with their own client’s captives, and thus did not further appeal. But CIC Services, apparently seeing nothing to lose, decided to soldier on and seek relief from the U.S. Court of Appeals for the Sixth Circuit.
To cut to the chase, the Sixth Circuit has now also given CIC Services the thumbs-down in a somewhat tediously technical opinion which you can read here. While noting that the IRS has established a tradition of falling short in complying with the Administrative Procedures Act, the Sixth Circuit nonetheless held that ultimately Notice 2016-66 involved the collection of taxes (or at least lead to the collection of taxes through its reporting requirements) such that APA challenges to such notices are off-limits to the federal courts.
Whether CIC Services will press on with its appeal is an open question. Presumably, they could request review from the Sixth Circuit en banc, petition for a Writ of Certiorari to the U.S. Supreme Court, or both. Having gone this far, why not? What’s a few more bucks for appellate counsel now when you have a chance of losing it all in the end either to the IRS in promoter penalties or to future class action lawyers anyway? And, somewhat surprising, CIC Services was able to get one of the appellate judges on the panel to issue a dissent, albeit based on the dubious nuance that Notice 2016-66 doesn’t itself cause any taxes to be collected, but only leads to information which then leads to the collection of taxes from folks engaged in abusive risk-pooled 831(b) captive insurance tax shelters.
The problem, however, is the very fundamental precept that one cannot unring a bell. Here, Notice 2016-66 has already had 99.9% of its intended effect, which was to cause promoters such as CIC Services to disclose their client lists and other information to the IRS, and to cause their clients to come to the realization that their spiffy captive deal might instead be an abusive tax shelter leading to not just the denial of deductions but also substantial penalties (20% seems to the be the least the IRS will consider in negotiations) as well. With a reported over 600 risk-pooled 831(b) captive cases now docketed before the U.S. Tax Court, there can be little doubt that Notice 2016-66 has served its purpose, and that well.