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

Supreme Court Allows Challenge to Micro-Captive Insurance Transaction Reporting Requirements to Go Forward

(Parker Tax Publishing May 2021)

Reversing the Sixth Circuit, the Supreme Court held that a lawsuit to enjoin enforcement of Notice 2016-66, which requires taxpayers and material advisors to report information about micro-captive insurance transactions, was not barred by the Anti-Injunction Act codified in Code Sec. 7421(a), even though a violation of the Notice may result in a tax penalty. The Court found that a suit to enjoin an information reporting requirement is not an action to restrain the assessment or collection of a tax, and the addition of a tax penalty did not change the outcome since the objective purpose of the lawsuit was to set aside the reporting requirement itself, not the tax penalty that may follow its breach. CIC Services LLC v. IRS, 2021 PTC 140 (S. Ct. 2021).


CIC Services LLC (CIC) is 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. The Code provides the parties to such an agreement with tax advantages. The insured party can deduct its premium payments as business expenses under Code Sec. 162(a), and the insurer can exclude up to $2.2 million of those premiums from its own taxable income under Code Sec. 831(b). These tax benefits are not available, however, if the money is not really for insurance - for example, if the insurance contract is a sham, which the affiliated companies have entered into only to escape tax liability.

To address the potential for abuse of micro-captives, the IRS issued Notice 2016-66, which identifies certain micro-captive agreements 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 the Notice subjects a taxpayer or material advisor to civil monetary penalties, which are deemed under Code Sec. 6671(a) to be taxes for purposes of the Code. 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 of prison.

CIC brought an action to challenge the lawfulness of Notice 2016-66. CIC filed its lawsuit before the Notice's first reporting date, rather than after a reporting violation, let alone payment of a penalty. CIC asserted that the IRS violated the Administrative Procedures Act (APA) by issuing Notice 2016-66 without notice-and-comment procedures. CIC also alleged that the Notice is arbitrary and capricious under the APA because it imposes new reporting requirements without proven need. The requested relief in CIC's complaint was for the court to enjoin the enforcement of Notice 2016-66 as an unlawful IRS rule and to declare that Notice 2016-66 is unlawful.

The government moved to dismiss CIC's action based on the Anti-Injunction Act, codified in Code Sec. 7421(a), which provides that courts do not have jurisdiction over a lawsuit for the purpose of restraining the assessment or collection of any tax. The government argued that CIC's requested relief would prevent the IRS from assessing a tax penalty against material advisors that disregard the Notice's reporting requirements. In the government's view, the way for CIC to bring its claims was to disobey the Notice and then sue for a refund of any resulting tax penalty. A district court agreed with the IRS and dismissed the case. A divided panel of the Sixth Circuit affirmed. The Supreme Court granted certiorari.

In Direct Marketing Assn. v. Brohl, 575 U.S. 1 (2015), the Supreme Court let proceed a lawsuit brought by out-of-state retailers to invalidate a Colorado law requiring them to report to the state's Department of Revenue any sale to a state resident on which they had not collected tax. The Court held that a suit about reporting requirements is not about the assessment or collection of taxes because information gathering occurs before assessment or collection. According to the Court, the Anti-Injunction Act is not keyed to all activities that may improve a state's ability to assess and collection taxes. Instead, it applies to acts of assessment and collection themselves. Thus, the question for the Court was whether the presence of the tax penalty meant that CIC's suit was for the purpose of restraining the assessment or collection of a tax.

The government agreed that under Direct Marketing, a lawsuit directed at ordinary reporting duties can go forward, unimpeded by the Anti-Injunction Act. But the government argued that the reporting obligations under Notice 2016-66 (unlike those in Direct Marketing) are backed up by a statutory tax penalty. The government pointed out that since CIC's requested relief was to enjoin the "enforcement" of Notice 2016-66, the purpose of its lawsuit was to prevent the IRS from collecting taxes. There was no real difference, the government asserted, between a suit to invalidate the Notice and one to preclude the tax penalty; avoiding the burdens of compliance with the Notice and avoiding the tax that sanctions noncompliance were two sides of the same coin. The government thus suggested that, by framing the suit as an attack on the Notice, CIC was trying to evade the Anti-Injunction Act through artful pleading. The government further contended that a ruling for CIC would lead to a wave of pre-enforcement actions by taxpayers asserting non-tax reasons for contesting the imposition of taxes.


The Supreme Court reversed the Sixth Circuit's ruling and allowed CIC's action to go forward. The Court explained that in considering the purpose of a lawsuit, courts look not at the taxpayer's subjective intent but rather to the action's objective aim - essentially, the relief the suit requests. Applying this standard, the Court found that CIC's complaint contested the legality of Notice 2016-66, not the statutory tax penalty that serves as one way to enforce it. The Court pointed out that CIC alleged that the Notice is procedurally and substantively flawed, but brought no legal claim against the separate statutory tax. In the Court's view, a request in an APA action to enjoin the enforcement of an IRS reporting rule is most naturally understood as a request to set aside that rule, not to block the application of a penalty that might be imposed for some yet-to-happen violation.

The Court rejected the government's argument that an injunction against the Notice is the same as one against the tax penalty and found that three aspects of the regulatory scheme at play, taken in combination, refuted the idea that this was a tax action in disguise. First, the Court found that Notice 2016-66 imposes affirmative reporting obligations, inflicting costs separate and apart from the penalty. The Court reasoned that obeying the reporting mandate is likely to involve significant time and expense - costs that may well exceed, or even dwarf, the tax penalties for a violation. According to the Court, CIC was challenging a regulatory mandate that (1) is not a tax and (2) entails compliance costs whose amount is not tied to, and often goes beyond, any tax. Second, the Court found that the Notice's reporting rule and the statutory tax penalty are several steps removed from each other. Before the penalty can be applied, CIC would have to withhold the required information about a micro-captive transaction, the IRS would determine that a violation has occurred, and finally, the IRS would have to decide to impose a tax penalty. The Court noted that CIC stood nowhere near the cusp of tax liability. Third, the Court found that a violation of the Notice is punishable not only by a tax, but by separate criminal penalties. The Court said that this fact clinched the case for treating a suit brought to set aside the Notice as different from one brought to restrain its back-up tax. The criminal penalties, in the Court's view, practically necessitated a pre-enforcement, rather than a refund suit. The Court reasoned that only an injunction against the Notice would give a taxpayer or advisor what it wants: relief from the obligation to report transactions.

The Court was not persuaded by the government's concern that a ruling for CIC would open the floodgates of pre-enforcement actions. The Court reiterated that this case was not a dispute over taxes and reasoned that, in a case involving a tax rule, there is no target for an injunction other than the command to pay the tax and no non-tax legal obligation to restrain. In such a case, the Anti-Injunction Act would bar pre-enforcement review, no matter the taxpayer's subjective reason for contesting the tax at issue. The Court further found that this was just as true when the tax in question is a so-called regulatory tax - that is, a tax designed mainly to influence private conduct rather than to raise revenue. The Anti-Injunction Act draws no distinction between regulatory and revenue-raising tax rules, the Court said, and applies whenever a suit calls for enjoining the IRS's assessment and collection of taxes.

Observation: In a concurring opinion, Justice Sotomayor noted that that the outcome may have been different had it been brought by a taxpayer rather than a material advisor. Justice Sotomayor reasoned that, when the IRS imposes a reporting obligation on a taxpayer that is backed by a tax penalty, the taxpayer may either (1) report the information, which the IRS may use to calculate the taxpayer's liability more accurately, or (2) refuse to provide the information and pay a noncompliance amount that is deemed a tax. Justice Sotomayor said that, in that case, the tax on noncompliance may operate as a rough substitute for the tax liability the taxpayer has evaded by withholding the required information. In addition, Justice Sotomayor pointed out that the compliance costs to a taxpayer reporting his or her own information may be lower than those of a material advisor. Hence, according to Justice Sotomayor, while it will often be correct to conclude that a tax advisor challenging an IRS reporting requirement is not doing so for the purpose of restraining a tax, the analysis may be different when it comes to taxpayers.

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