A Magistrate judge in Tennessee has ruled that CIC Services should not be awarded attorneys’ fees in its case against the Internal Revenue Service (IRS), arguing that the agency’s losing position was substantially justified.
A Bloomberg Law article reported that in siding with the IRS over the fees, Tennessee Magistrate Judge Jill E. McCook said the agency had not disregarded any binding court precedent when it maintained that the requirement did not have to go through a notice-and-comment process under the Administrative Procedure Act.
“The IRS therefore did not take a position that was ‘flatly at odds with the controlling case law’ but instead it ‘lost because an unsettled question was resolved unfavourably,’” McCook said.
The firm brought the case to challenge IRS Notice 2016-66, which required captives taking the 831(b) election and their insurance advisers to report on the transactions.
In a GCP Short episode released in March last year, three legal and captive experts from the US discussed the judgement from the District Court of Eastern Tennessee striking down the IRS’s controversial Notice 2016-66.
CIC Services LLC asked for the fees in the long-standing case that had also included a trip to the United States Supreme Court.
The company had highlighted the Equal Access to Justice Act as reasoning for being awarded the fees, as the Act provides parties who beat the US in a civil case with attorneys’ fees unless the government’s position was substantially justified or other special circumstances make an award of the fees unreasonable.
CIC Services agreed that the agency’s position that the suit was blocked by the Anti-Injunction Act was substantially justified, even though the Supreme Court sided with the firm in 2021, according to the IRS.
The IRS defended its justification for arguing that its reporting requirement did not need to be issued by first giving notice and responding to public comments, even though it lost on that point at the district court in 2022.
The final decision on awarding attorneys’ will be decided Chief Judge Travis R. McDonough at the US District Court for the Eastern District of Tennessee.
Captive Intelligence reported in April that the IRS has now proposed new regulations for micro-captives, which have divided opinion across America’s captive landscape.
Under the Notice, the IRS proposed regulations would see certain 831(b) captives deemed “listed transactions” and other micro-captive transactions labelled “transactions of interest”.
The majority of captives that record a loss ratio under 65% would be considered a “listed transaction”.
More than 100 comments have been submitted in response to the IRS latest proposed regulations, including from CICA, SIIA and the Oklahoma Department of Insurance.
The 831(b) Institute was launched at the of June in the US and has asked for clarity from the IRS around how it regulates micro-captives, arguing that it “unfairly” scrutinises them.