Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

Court Enjoins Enforcement of IRS Reporting Rules for Micro-captive Transactions

(Parker Tax Publishing October 2021)

A district court enjoined the IRS from enforcing Notice 2016-66, which identifies micro-captive insurance transactions as transactions of interest and requires taxpayers and material advisors to disclose their involvement in them. The court found that Notice 2016-66 is a legislative rule, subject to the notice and comment procedures of the Administrative Procedure Act, because it imposes new requirements on taxpayers rather than simply interpreting legal norms previously created by Congress or the IRS. CIC Services, LLC v. IRS, 2021 PTC 303 (E.D. Tenn. 2021).


CIC Services, LLC (CIC) is a manager of captive insurance companies and a material advisor to taxpayers participating in micro-captive insurance transactions. A micro-captive transaction is typically an insurance agreement between a parent company and a "captive" insurer under its control which provides tax advantages including a deduction for the insured party's premium payments as business expenses under Code Sec. 162(a) and the exclusion by the insurer of those premiums from its own taxable income under Code Sec. 831(b).

In Notice 2016-66, the IRS identified micro-captive transactions as having the potential for tax avoidance or evasion and classified them as reportable transactions. Under Notice 2016-66, taxpayers and material advisors are required to (among other things) describe the transaction in sufficient detail for the IRS to be able to understand its tax structure. Noncompliance with Notice 2016-66 subjects a taxpayer or material advisor to civil monetary penalties. In addition, if a breach of the reporting requirement is determined to be willful, such a violation is a misdemeanor, punishable by fines and up to a year in prison.

In 2017, CIC brought an action to challenge the lawfulness of Notice 2016-66. CIC argued that Notice 2016-66 constitutes a legislative rule that failed to comply with the notice and comment requirements under the Administrative Procedures Act (APA) and asked the court for a preliminary injunction to bar the IRS from enforcing the disclosure requirements. A district court denied CIC's motion after finding that its claim was foreclosed by the Anti-Injunction Act (AIA) and the court therefore lacked jurisdiction. The case eventually made its way to the Supreme Court where, in CIC Services, LLC v. IRS, 2021 PTC 140 (S. Ct. 2021), the Court held that the AIA did not deprive the district court of subject matter jurisdiction and remanded the case.

Under the APA, legislative rules are subject to notice and comment requirements while interpretive rules are not. A rule is legislative if it supplements a statute, adopts a new position inconsistent with existing regulations, or otherwise effects a substantive change in existing law or policy. Likewise, a rule is legislative if it expands the footprint of a regulation by imposing new requirements, rather than simply interpreting the legal norms Congress previously created.

When reviewing a motion for a preliminary injunction, courts must consider the following: (1) the movant's likelihood of success on the merits; (2) whether the movant will suffer irreparable injury without an injunction; (3) whether granting the motion would cause substantial harm to others; and (4) whether the public interest would be served by granting the motion. These considerations are factors to balanced, rather than prerequisites that must each be satisfied before relief may be granted.

CIC renewed its argument that Notice 2016-66 is a legislative rule under the APA. CIC added that it was notified by the IRS in 2020 that it was under audit as a potential tax shelter promoter and was served with a request for production of documents. CIC also noted that to date, it had complied with the Notice's requirements, expending hundreds of hours of employee labor and thousands of dollars in costs per year. CIC estimated it would spend over $60,000 per year to comply with the Notice's reporting requirements and that it had already expended at least $400,000 over the past four years in out-of-pocket costs and expenses associated with complying with the reporting requirements of Notice 2016-66.


The district court granted CIC's motion and enjoined the IRS from enforcing Notice 2016-66 against CIC. The court found that CIC was likely to succeed on the merits of its claim that Notice 2016-66 is a legislative rule which was subject to the APA's notice and comment procedures. The court noted that in Reg. Sec. 1.6011-4(b)(6), the term "transaction of interest" is nebulously defined as a transaction that is the same or substantially similar to one of the types of transactions that the IRS has identified in published guidance as a transaction of interest. Thus, the court said that a transaction of interest is effectively any transaction the IRS believes is the same or similar to any other transaction it has previously deemed a transaction of interest. Such a circular definition, in the court's view, amounts to a catchall that seemingly grants the IRS unlimited discretion. As a result, the court found that classifying a transaction as a transaction of interest through an agency-issued notice like Notice 2016-66 constitutes a legislative rule because it expands the footprint of Reg. Sec. 1.6011-4(b) by creating new rights and duties regarding reporting requirements related to reportable transactions. Notice 2016-66 therefore has the force of law, the court reasoned, especially considering that failure to comply with the newly applicable reporting requirements exposes material advisors like CIC to monetary fines and criminal prosecution. The court found that Notice 2016-66 is not an interpretive rule because it goes beyond merely putting the public on notice of preexisting legal obligations and beyond reminding affected parties of existing duties.

The court also determined that CIC had suffered and would likely continue to suffer at least some irreparable harm in the absence of an injunction. The court, noting CIC's estimated costs to comply with the reporting requirements of Notice 2016-66 and the costs it had already incurred, said that it was unaware of any mechanism by which CIC could ever recover these costs in the event that Notice 2016-66 was ultimately found to be invalid. Therefore, the court found that CIC demonstrated at least some irreparable harm if the injunction was not granted.

With regard to the factor of whether an injunction would cause harm to others, the court found that this factor did not weigh in favor of, or against, the preliminary injunction and was significantly less important than the other factors. On the issue of the whether the public interest would be served by granting the motion, the court reasoned that the public interest in identifying potential tax avoidance transactions had to be weighed against the public interest in agencies issuing rules that have the effect of law through procedures mandated by Congress through the APA. Accordingly, the court found this factor to be neutral.

For a discussion of micro-captive insurance arrangements, see Parker Tax ¶92,730.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2021 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance