Amicus Curiae Brief — CIC Services, LLC, Petitioner v. Internal Revenue Service, et al.

Supreme Court briefJul 22, 2020

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No. 19-930

In the Supreme Court of the United States

__________________

CIC SERVICES, LLC, Petitioner,

INTERNAL REVENUE SERVICE, ET AL., Respondents.

__________________

On Writ of Certiorari to the United States

Court of Appeals for the Sixth Circuit

__________________

BRIEF OF THE ALABAMA CAPTIVE INSURANCE ASSOCIATION, INC.,

ARIZONA CAPTIVE INSURANCE ASSOCIATION, INC., CAPTIVE INSURANCE

COMPANIES ASSOCIATION, INC., CONNECTICUT CAPTIVE INSURANCE

ASSOCIATION, DELAWARE CAPTIVE INSURANCE ASSOCIATION, INC.,

CAPTIVE INSURANCE COUNCIL OF THE DISTRICT OF COLUMBIA, INC.,

GEORGIA CAPTIVE INSURANCE ASSOCIATION, INC., HAWAII CAPTIVE

I NSURANCE C OUNCIL C ORPORATION , K ENTUCKY C APTIVE

ASSOCIATION, INC., MISSOURI CAPTIVE INSURANCE ASSOCIATION,

MONTANA CAPTIVE INSURANCE ASSOCIATION, INC., NEVADA CAPTIVE

INSURANCE COUNCIL, CAPTIVE INSURANCE GROUP OF NEW JERSEY,

NORTH CAROLINA CAPTIVE INSURANCE ASSOCIATION, OKLAHOMA

CAPTIVE INSURANCE ASSOCIATION, PUERTO RICO INTERNATIONAL

INSURERS ASSOCIATION, SELF-INSURANCE INSTITUTE OF AMERICA,

INC., SOUTH CAROLINA CAPTIVE INSURANCE ASSOCIATION, INC.,

TENNESSEE CAPTIVE INSURANCE ASSOCIATION, INC., TEXAS CAPTIVE

INSURANCE ASSOCIATION, UTAH CAPTIVE INSURANCE ASSOCIATION,

U.S. VIRGIN ISLANDS CAPTIVE INSURANCE ASSOCIATION, AND

VERMONT CAPTIVE INSURANCE ASSOCIATION AS AMICI CURIAE IN

SUPPORT OF PETITIONER

__________________

WILLIAM YOUNG WEBB

Of Counsel

WEBB & MORTON, PLLC

910 N. Sandhills Boulevard

Aberdeen, NC 28315

(910) 944-9555

K. SCOTT HAMILTON

Counsel of Record

KEVIN M. DOHERTY

TONY D. GREER

DICKINSON WRIGHT PLLC

500 Woodward Avenue, Suite 4000

Detroit, MI 48226

(313) 223-3500

KHamilton@dickinson-wright.com

Counsel for Amici Curiae

July 22, 2020

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

TABLE OF CONTENTS

TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . iii

STATEMENT OF INTEREST . . . . . . . . . . . . . . . . . . 1

BACKGROUND ON INSURANCE REGULATION

AND CAPTIVE INSURANCE COMPANIES . . . 5

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . 9

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Impact of Notice 2016-66 on the Captive

Insurance Industry:. . . . . . . . . . . . . . . . . . . . 10

A. Notice 2016-66 imposes a heavy burden

on the public and causes ongoing

irreparable harm to the captive insurance

industry and its stakeholders . . . . . . . . . 10

B. Notice 2016-66 has a chilling effect on the

captive insurance industry . . . . . . . . . . . 19

II.

The APA should apply to Notice 2016-66, and

because there was no meaningful opportunity

to comment on the proposed rule through the

submission of written data, views, or

arguments, Notice 2016-66 should be

declared invalid . . . . . . . . . . . . . . . . . . . . . . . 21

A. The APA serves as a conduit for public

input that permits agencies to craft the

wisest rules. . . . . . . . . . . . . . . . . . . . . . . . 21

B. While recognizing that not all § 831(b)

transactions are abusive, Notice 2016-66

arbitrarily and capriciously applies to

essentially all § 831(b) transactions, even

though the IRS admits its lack of

information regarding the captive

insurance industry . . . . . . . . . . . . . . . . . . 26

III.

Information gathering is a phase of tax

administration procedure that occurs before

the assessment of a tax, and the AIA should

not apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

APPENDIX

Appendix A U.S. Captive Domiciles . . . . . . . . App. 1

Appendix B Letter from the State of Utah

Insurance Department to the

Honorable John Koskinen dated

January 27, 2017 . . . . . . . . . . . . . App. 3

Appendix C Audit Document Request . . . . . . . App. 7

iii

TABLE OF AUTHORITIES

CASES

Am. Mining Cong. v. Mine Safety & Health Admin.,

995 F.2d 1106, 302 U.S. App. D.C. 38

(D.C. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . 23, 25

Avrahami v. Comm’r,

149 T.C. 7 (T.C. Aug. 21, 2017) . . . . . . . . . . . . . 14

CIC Servs., LLC v. IRS,

2017 WL 5015510 (E.D. Tennessee). . . . . . . . . . 30

CIC Servs., LLC v. IRS,

925 F.3d 247 (6th Cir. 2019). . . . . . . . . . 30, 31, 32

CIC Servs., LLC v. IRS,

936 F.3d 501 (6th Cir. 2019). . . . . . . . . . . . . . . . 30

Chrysler Corp. v. Brown,

441 U.S. 281 (1979). . . . . . . . . . . . . . . . . . . . 22, 23

Dep’t of Homeland Sec. v. Regents of the Univ.

of Cal., 591 U.S. ___ (2020). . . . . . . . . . . . . . . . . 31

Direct Mktg. Ass’n v. Brohl,

575 U.S. 1 (2015). . . . . . . . . . . . . . . . . . . . . . . 9, 31

Dismas Charities, Inc. v. United States Department

of Justice, 401 F.3d 666 (6th Cir.2005) . . . . 23, 26

Enochs v. Williams Packing & Nav. Co.,

370 U.S. 1 (1962). . . . . . . . . . . . . . . . . . . . . . . . . 30

Fertilizer Inst. v. United States Envt’l Prot. Agency,

935 F.2d 1303 (D.C. Cir. 1991) . . . . . . . . . . . . . . 24

First Nat’l Bank v. Sanders,

946 F.2d 1185 (6th Cir. 1991). . . . . . . . . . . . 23, 24

Friedrich v. Sec’y of Health & Human Servs.,

894 F.2d 829 (6th Cir. 1990). . . . . . . . . . . . . . . . 22

General Motors Corp. v. Ruckelshaus,

742 F.2d 1561 (D.C. Cir. 1984) . . . . . . . . . . . . . . 22

Gregory v. Helvering,

69 F.2d 809 (2d Cir. 1934) . . . . . . . . . . . . . . . . . 10

Mayo Found. for Med. Educ. & Research v.

United States, 562 U.S. 44 (2011) . . . . . . . . . . . . 9

Nat’l Fed. of Indep. Bus. v. Sebelius,

567 U.S. 519 (2012). . . . . . . . . . . . . . . . . . . . 30, 31

Nat’l Mining Ass’n v. McCarthy,

758 F.3d 243 (D.C. Cir. 2014) . . . . . . . . . . . . . . . 23

Ohio Coal Ass’n v. Perez,

S.D. Ohio No. 2: l 4-cv-2646, 2016 U.S. Dist.

LEXIS 78655 (June 16, 2016) . . . . . . . . . . . . . . 23

Perez v. Mortg. Bankers Ass’n,

575 U.S. 92, 135 S. Ct. 1199 (2015) . . . 3, 9, 21, 24

Reserve Mechanical Corp. v. Comm’r,

T.C. Memo. 2018-86 (T.C. June 18, 2018) . . . . . 14

Summa Holdings, Inc. v. Comm’r of Internal

Revenue, 848 F.3d 779 (6th Cir. 2017) . . . . . . . . 10

Syzygy Insurance Co., Inc., et al. v. Comm’r,

T.C. Memo. 2019-34 (April 10, 2019) . . . . . . . . . 14

United States v. Picciotto,

875 F.2d 345 (D.C. Cir. 1989) . . . . . . . . . . . . . . . 24

STATUTES

5 U.S.C. § 551(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5 U.S.C. § 551(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5 U.S.C. § 553 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

5 U.S.C. § 553(b)(A) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(b)(B) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(c) . . . . . . . . . . . . . . . . . . . . . 3, 9, 24, 25

5 U.S.C. § 553(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 706(2)(D) . . . . . . . . . . . . . . . . . . . . . . . . . 21

8 U.S.C. § 1252(b)(9) . . . . . . . . . . . . . . . . . . . . . . . . 31

15 U.S.C. § 1012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

26 U.S.C. § 831(b). . . . . . . . . . . . . . . . . . . . . . . passim

26 U.S.C. § 6111 . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31

26 U.S.C. § 6112 . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31

26 U.S.C. § 6671(a). . . . . . . . . . . . . . . . . . . . . . . . . . 31

26 U.S.C. § 7421(a). . . . . . . . . . . . . . . . . . 9, 29, 30, 31

Consolidated Appropriations Act of 2018,

Pub. L. 115–141 . . . . . . . . . . . . . . . . . . . . . . . . . 16

PATH Act, 129 Stat. 3106-08. . . . . . . . . . . . . . . . . . 16

OTHER AUTHORITIES

C. Anastopoulo, “Taking No Prisoners: Captive

Insurance as an Alternative to Traditional or

Commercial Insurance,” 8 Ohio St. Entrep. Bus.

L.J. 209 (2013). . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

“Internal Revenue Service, Abusive tax shelters,

trusts, conservation easements make IRS’ 2019

‘Dirty Dozen’ list of tax scams to avoid” (March

19, 2019), available at www.irs.gov/newsroom/

abusive-tax-shelters-trusts-conservationeasements-make-irs-2019-dirty-dozen-list-of-taxscams-to-avoid. . . . . . . . . . . . . . . . . . . . . . . . 12, 16

IRS, Instructions for Form 8886, at 7, available at

https://www.irs.gov/pub/irs-pdf/i8886.pdf . . 11

IRS takes next step on abusive micro-captive

transactions; nearly 80 percent accept

settlement, 12 new audit teams established,

available at www.irs.gov/newsroom/irs-takesnext-step-on-abusive-micro-captive-transactionsnearly-80-percent-accept-settlement-12-newaudit-teams-established . . . . . . . . . . . . . . . . . . . 12

“IRS unveils ‘Dirty Dozen’ list of tax scams for 2020;

Americans urged to be vigilant to these threats

during the pandemic and its aftermath,”

available at https://www.irs.gov/newsroom/irsunveils-dirty-dozen-list-of-tax-scams-for-2020americans-urged-to-be-vigilant-to-these-threatsduring-the-pandemic-and-its-aftermath . . . . . . 16

vii

IRS update on “micro-captive insurance

transactions,”

available

home.kpmg/us/en/home/insights/2020/01/t

nf-irs-update-on-micro-captive-insurancetransactions.html . . . . . . . . . . . . . . . . . . . . . . . . 12

Joint Committee on Taxation, Technical

Explanation of the Revenue Provisions of the

Protecting Americans from Tax Hikes Act of

2015, House Amendment #2 to the Senate

Amendment to H.R. 2029 (Rules Committee Print

114-40), (JCX-144-15), December 17, 2015 . . . . 15

“June 15, 2017 letter from SIIA to Treasury

Secretary Mnuchin,” available at

http://files.constantcontact.com/9d218c3c001/0

5dafb54-5f9b-4fba-b08e-512c318af2cb.pdf. . 11, 12

Letter from SIIA to the IRS, dated October 17, 2016,

available at

https://www.siia.org/files/0f5af4a0-5c12-4dc5aa0e-b3cd6d9cfd08.pdf . . . . . . . . . . . . . . . . . . . . 28

Notice 2015-74, available at www.irs.gov/pub/irsdrop/n-15-74.pdf . . . . . . . . . . . . . . . . . . . . . . 28, 29

Notice 2016-66, available at

https://www.irs.gov/pub/irs-drop/n-16-66.

pdf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

“Once Scrutinized, an Insurance Product Becomes a

Crisis Lifeline,” available at

https://www.nytimes.com/2020/03/20/yourmoney/coronavirus-insurance-smallbusiness.html . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

viii

“Post-COVID-19, Some Businesses May Look to

Captives for BI Solutions, Observers Say,”

available at https://media.cicaworld.com/wpcontent/uploads/2020/05/Post-COVID-19-SomeBusinesses-May-Look-to-Captives-for-BISolutions-Observers-Say.pdf . . . . . . . . . . . . 18, 19

“SIIA calls for review of IRS’ ‘activities’ in response

to Executive Order for regulatory relief,”

available at

http://www.captiveinsurancetimes.com/captiv

einsurancenews/article.php?article_id=6905 . . 17

SIIA Comment Letter to the Acting Secretary of the

Treasury and the IRS Commissioner, dated

January 30, 2017, available at

https://www.siia.org/files/News/Notice_201666_-_SIIA_Comment_Letter_-_Final_.pdf . . . . . 28

SIIA Letter to Treasury Secretary Mnuchin

Regarding Executive Order 13789 –Identifying &

Reducing Tax Regulatory Burdens, Dated June

15, 2020, available at

http://files.constantcontact.com/9d218c3c001/0

5dafb54-5f9b-4fba-b08e-512c318af2cb.pdf. . 13, 14

“SRS Charts the Total Number of Active Captives

for 2018,” available at www.captive.com/news/

2019/02/25/srs-charts-the-total-number-ofactive-captives-for-2018 . . . . . . . . . . . . . . 1, 13, 20

The above captive insurance associations

(collectively, the “Captive Associations”) submit this

brief as amici curiae in support of the Petitioner, CIC

Services, LLC.1

STATEMENT OF INTEREST

The aforementioned Captive Associations (the

“Amici”) are unaffiliated trade organizations

representing the interests of their respective members

regarding the captive insurance industry.

The

membership of the Captive Associations primarily

includes captive insurance companies and related cells

(each being referred to herein as a “captive”) and their

owners, captive insurance managers, attorneys,

actuaries, investment managers, certified public

accountants, banks, financial institutions, and others.

Together, these Captive Associations have thousands

of members, including over 3,200 captive insurance

companies and over 1,800 related cells (for a total of

over 5,000 captives). See “U.S. Domestic Captive

Domiciles as of Year-End 2018,” attached hereto as

Appendix A; and “SRS Charts the Total Number of

Active Captives for 2018,” available at

www.captive.com/news/2019/02/25/srs-charts-the-totalnumber-of-active-captives-for-2018.

All of these

Pursuant to Rule 37.6, counsel for the Amici states that no

counsel for a party authored this brief in whole or in part, and no

party or counsel for a party made a monetary contribution

intended to fund the preparation or submission of this brief. No

person other than the Amici, their members, or their counsel made

a monetary contribution to its preparation or submission. Counsel

for the Amici provided timely notice of the Amici’s intent to file

this brief, and all parties have consented to its filing.

Captive Associations promote the compliant and

solvent operation of captives through professional

education, networking events, and engagement in

legislative and regulatory affairs.

In addition to the state and United States territory

based Captive Associations, two members of the Amici,

the Captive Insurance Companies Association, Inc.

(“CICA”), and the Self-Insurance Institute of America,

Inc. (“SIIA”), are national, not for profit, member-based

trade associations. Like the other Amici, CICA and

SIIA are dedicated to the advancement of the captive

insurance industry, and their membership includes

self-insured entities, third-party administrators,

captives, captive owners and managers, excess/stoploss insurance carriers, and industry service providers

(ranging from small professional firms to large

commercial insurers and brokers). These members

develop industry best practices, receive and

disseminate education on industry issues, and engage

policymakers and regulators on a range of subjects

relevant to the effective functioning of captive

insurance programs and the nation’s self-insurance

systems, including self-funded health plans, workers’

compensation plans,

and property and liability

programs.

The Amici file this brief to request that the Court

overturn the decision from the Sixth Circuit Court of

Appeals. At a minimum, the Amici ask the Court to

consider what the Internal Revenue Service (“IRS”) did

not address, namely the detrimental impact of IRS

Notice 2016-66 (“Notice 2016-66”) on captives making

the election under 26 U.S.C. § 831(b) (“§ 831(b)”) and

the captive insurance industry as a whole. The

Administrative Procedures Act (“APA”) requires an

agency to allow interested persons an opportunity to

participate in the rulemaking through the submission

of written data, views, or arguments. See 5 U.S.C.

§ 553(c). Further, this Court has held that an agency

is obligated to respond to significant comments. See

Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 135 S. Ct.

1199, 1203 (2015). However, the IRS did not allow

interested persons a meaningful opportunity to

participate in the making of Notice 2016-66, as

required by the APA. Although Notice 2016-66

included a mechanism for the public to comment on

how micro-captive transactions “might be addressed in

[future] published guidance,” those comments were

requested on or before the day taxpayers originally

were required to report under Notice 2016-66. Thus,

any future published guidance would be of no use to

taxpayers required to comply before that deadline.

Further, the IRS did not respond to any significant

comments or concerns.

Finally, the Amici contend that Notice 2016-66

relates to the reporting of tax-related information, and

not the assessment or collection of a tax. Therefore,

the Anti-Injunction Act (“AIA”) should not apply and

prohibit the Amici from pursuing the relief set forth

herein.

Consequently, the Amici request the Court to

consider the following:

Impact of Notice 2016-66 on the Captive

Insurance Industry:

A. Notice 2016-66 imposes a heavy burden on

the public and causes ongoing irreparable harm to the

captive insurance industry and its stakeholders; and

B. Notice 2016-66 has a chilling effect on the

captive insurance industry.

II.

The APA should apply to Notice 2016-66, and

because there was no meaningful opportunity to

comment on the proposed rule through the submission

of written data, views, or arguments, Notice 2016-66

should be declared invalid.

The APA serves as a conduit for public

input that permits agencies to craft the wisest rules;

and

B. While recognizing that not all § 831(b)

transactions are abusive, Notice 2016-66 arbitrarily

and capriciously applies to essentially all § 831(b)

transactions, even though the IRS admits its lack of

information regarding the captive insurance industry.

III.

Information gathering is a phase of tax

administration procedure that occurs before the

assessment of a tax, and the AIA should not apply.

The Amici offer no opinion on any other particular

facts or structure of any insurance program at issue or

otherwise, and fully support appropriate efforts by the

IRS to curtail those transactions which are actually

abusive that serve to undermine the industry.

BACKGROUND ON INSURANCE

REGULATION AND CAPTIVE INSURANCE

COMPANIES

Insurance Regulation

State-based insurance regulation has a more than

100-year history of success in the United States.

Congress, in passing the McCarran-Ferguson Act of

1945, exclusively reserved to the States the power to

regulate insurance.

The States, the District of

Columbia, and several territories each participate in

this national system of state-based regulation.

The McCarran-Ferguson Act states that “No Act of

Congress shall be construed to invalidate, impair, or

supersede any law enacted by any State for the purpose

of regulating the business of insurance.” 15 U.S.C.

§ 1012. Since its passage, Congress has concluded that

“the business of insurance, and every person engaged

therein, shall be subject to the laws of the several

States which relate to the regulation or taxation of

such business.” 15 U.S.C. § 1012. As a result, every

State has comprehensive insurance regulation and

oversight capabilities.

At least 35 United States jurisdictions, including

States, territories, and the District of Columbia permit

licensing and regulation of captives. In each of these

domiciles, the applicable regulator has the authority to

grant an insurance license to a company, after

regulatory review and subject to ongoing oversight.

Many States have dedicated professional staff that

exclusively regulate captive insurance.

Robust Regulatory Standards

All domestic domiciles that regulate captive

insurance require each applicant for a license to

complete background checks, maintain certain capital

levels, and provide financial information on demand.

The vast majority also require annual review by

independent actuaries, as well as annual audits by

independent CPAs and/or examinations by the

regulator, among other requirements.

The standards and requirements that domestic

regulators impose on insurance companies, and on

captives in particular, are intended to protect

policyholders by ensuring solvency. The standards and

requirements are remarkably consistent across the

country, and address all aspects of insurance company

operation, including the subject of the insurance, the

characteristics of the insurance policies, and the

structure of reinsurance arrangements.

In the various United States captive jurisdictions,

the insurance regulators play a very active role in

regulating the captive insurance industry. See “Letter

from Utah Insurance Commissioner Todd E. Kiser to

the IRS Commissioner, dated January 27, 2017”

(attached hereto as Appendix B). For example, in

order to gain licensure in any United States captive

jurisdiction, every captive must submit an application

and a feasibility study prepared by a credentialed

actuary. Each jurisdiction’s insurance regulator closely

reviews and monitors each captive to determine

whether it is properly funded, has the necessary

liquidity, insures only appropriate risks, and prices its

premiums appropriately.

Captive Insurance Companies

Captive insurance is a highly regulated and

formalized type of risk management that has existed

for over 50 years, allowing companies, or groups of

companies, to better manage their own risk. It is a

common risk management tool utilized by a wide range

of public, private, and not-for-profit entities, including

colleges and universities, Fortune 500 companies, local

businesses, hospitals, manufacturers, religious and

community organizations, and virtually every other

type of business. Captive insurance covers an equally

diverse and important set of business risk profiles,

from property, general liability, product liability,

workers’ compensation, and medical stop loss

insurance, to business and supply chain interruption

and many other coverages.

Nearly 5,000 captives are domiciled in and

regulated by at least 35 States, demonstrating a

healthy and material industry in the United States. By

definition, a captive is a type of insurance company

formed under applicable state law that provides

insurance coverage to its owners and affiliates.

Captives can either be owned by one company or by

numerous unrelated entities, similar to a mutual

insurance company. Many of the aforementioned 5,000

captives are group captives or protected cell captives,

each of which houses the captive insurance programs

of any number of unrelated businesses. Indeed, there

are thousands of unique business organizations that

participate in captives.

Captives may take many forms. The simplest

structure is a “pure” or single-owner captive created by

a parent company to provide insurance to itself and its

affiliates. See C. Anastopoulo, “Taking No Prisoners:

Captive Insurance as an Alternative to Traditional or

Commercial Insurance,” 8 Ohio St. Entrep. Bus. L.J.

209, 213, 221-23 (2013). Even in this “pure” captive

arrangement, like third-party insurers, the captive

receives premiums from its parent company in

exchange for coverage. The only difference is that the

insured (the parent) controls the insurer (the captive).

Id., at 221-25 (outlining the various types of captives).

Captives provide several benefits over third-party

commercial insurers. In addition to more affordable

coverage, a captive can underwrite more customized

policies than those available on the open market. Id.,

at 216. With actuarial support, captives can tailor

deductible and premium amounts, coverage scope, and

risk tolerance because these insurers “address risk

positions for the parent based solely on the parent’s

actual risk exposure and history, rather than an

industry-wide calculation.” Id. This is especially

important for industries where ordinary commercial

insurers have a hard time evaluating the relevant

risks. Id., at 213-14, 216.

Captives also offer a more responsive claims

process. Id., at 216-17. Submitting claims to a

commercial insurer that has “the incentive to deny

claims or delay in paying claims” is time-consuming,

adversarial, and litigious. Id., at 217. By contrast, the

parent and captive have “the same incentive to pay the

claim from the captive’s reserves.” Id., at 216.

SUMMARY OF ARGUMENT

First, the Amici ask this Court to consider the

written data, views and arguments of the Amici that

Notice 2016-66 imposes a heavy burden on the public

and causes ongoing irreparable harm to the captive

insurance industry and its stakeholders.

Second, the APA requires an agency to allow for a

meaningful opportunity for public comment on the

proposed rule through the submission of written data,

views, or arguments. See 5 U.S.C. § 553(c). Further,

this Court has held that an agency is obligated to

respond to significant comments. See Perez v. Mortg.

Bankers Ass’n, 575 U.S. 92, 135 S. Ct. 1199, 1203

(2015). However, the Issuance of Notice 2016-66 by the

IRS did not comply with the APA. Such a result is

particularly concerning to the Amici, as this Court has

made clear that tax rules are subject to the same types

of review as other administrative regulations. See, e.g.,

Mayo Found. for Med. Educ. & Research v. United

States, 562 U.S. 44 (2011).

Had the IRS followed the APA, the concerns of the

Amici regarding the impact of Notice 2016-66 would

have been addressed. Because the IRS failed to follow

the APA, the Amici ask this Court to overturn the

decision of the Sixth Circuit.

Third, the AIA prohibits suits brought “for the

purpose of restraining the assessment or collection of

any tax,” 26 U.S.C. § 7421(a), and this Court recently

explained that the terms “assessment” and “collection”

do not extend to mere reporting requirements. Direct

Mktg. Ass’n v. Brohl, 575 U.S. 1, 8 (2015). The Amici

urge this Court to determine that the AIA does not

prevent pre-enforcement challenges to tax rules not

involving the assessment or collection of taxes.

ARGUMENT

Impact of Notice 2016-66 on the Captive

Insurance Industry:

A. Notice 2016-66 imposes a heavy burden

on the public and causes ongoing

irreparable harm to the captive

insurance industry and its stakeholders.

The IRS claims that Notice 2016-66 is necessary to

identify which § 831(b) arrangements should be

identified specifically as tax “avoidance” transactions.2

In reality, however, Notice 2016-66 appears to be

designed to burden the industry and thereby diminish

its size and scope. Notice 2016-66 requires essentially

all captives making the § 831(b) election, their owners,

the insured operating entity(ies) and owners, and any

reinsurer, to submit IRS Form 8886, Reportable

It has long been accepted that taking advantage of the tax code

to lower one’s taxes is perfectly acceptable. “Any one may so

arrange his affairs that his taxes shall be as low as possible; he is

not bound to choose that pattern which will best pay the Treasury;

there is not even a patriotic duty to increase one’s taxes.” Gregory

v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934). Further, the Sixth

Circuit rejected the IRS’s substance-over-form doctrine to

restructure a transaction where the Internal Revenue Code

sections at play had the sole purpose of tax avoidance. See Summa

Holdings, Inc. v. Commissioner of Internal Revenue, 848 F.3d 779,

789 (6th Cir. 2017). The Sixth Circuit also stated that if such

results were unintended, it was within Congress’ power to correct

it. Id., at 789-90.

Transaction Disclosure Statement. In addition, socalled “material advisors,” like the Petitioner, must file

Form 8918, Material Advisor Disclosure Statement.

Although blank copies of Form 8886 are a mere two

pages in length, the completed form can be extremely

long and complicated. In fact, by the IRS’ own

estimate, Form 8886 takes more than twenty-one

hours, i.e., over half of a standard workweek, to

complete. See IRS, Instructions for Form 8886, at 7,

available at https://www.irs.gov/pub/irspdf/i8886.pdf. For some businesses, including many of

the Amici’s members, this presents a very heavy new

paperwork expansion. If each of the estimated 5,000

captive members of the Amici spent 21.5 hours

preparing Form 8886, they would collectively spend

over 100,000 hours per year complying with Notice

2016-66. And these figures do not include all of the

multiple owners, individuals and holding companies

that must fill out Form 8886. With them included, the

amount of time to complete all of the Form 8886’s

would double or triple. Additionally, these numbers do

not include Form 8918 to be prepared and submitted by

advisors, such as captive managers, CPAs and lawyers,

on whom the burden is potentially prohibitive. At the

IRS’ estimated rate, an advisor who provides material

advice to only 52 captives would spend the equivalent

of approximately six months each year preparing the

paperwork associated with Notice 2016-66. For

example, SIIA surveyed hundreds of its captive

members and found that they had filed over 15,000

forms at a collective cost of $22,186,800, to comply with

Notice 2016-66. See “June 15, 2017 letter from SIIA to

Treasury Secretary Mnuchin,” available at

http://files.constantcontact.com/9d218c3c001/05dafb545f9b-4fba-b08e-512c318af2cb.pdf.

In contrast with this onerous burden, the actual

benefits of Notice 2016-66 to the IRS are likely to be

minimal when compared to the amount of information

gathered through the IRS audit process. The Amici are

aware of an extensive series of audits that the IRS is

conducting and has conducted over the last several

years.3 There are more than 500 docketed captive

insurance cases in Tax Court involving § 831(b). See

“Abusive tax shelters, trusts, conservation easements

make IRS’ 2019 ‘Dirty Dozen’ list of tax scams to

avoid,” (March 19, 2019), available at

www.irs.gov/newsroom/abusive-tax-shelters-trustsconservation-easements-make-irs-2019-dirty-dozen-listof-tax-scams-to-avoid. It is also estimated that there

are, or soon will be, several thousand captive insurance

arrangements under audit by the IRS. See IRS update

on “micro-captive insurance transactions,” available at

home.kpmg/us/en/home/insights/2020/01/tnf-irsupdate-on-micro-captive-insurance-transactions.html.

On January 31, 2020, the IRS Commissioner stated that the IRS

will “vigorously pursue those involved in these and other similar

abusive transactions going forward. . . Enforcement activity in this

area is being significantly increased. To that end, the IRS is

deploying additional resources, which includes setting up 12 new

examination teams . . . that will be working to address these

abusive transactions and open additional exams.” See IRS takes

next step on abusive micro-captive transactions; nearly 80 percent

accept settlement, 12 new audit teams established, available at

www.irs.gov/newsroom/irs-takes-next-step-on-abusive-microcaptive-transactions-nearly-80-percent-accept-settlement-12-newaudit-teams-established.

Further, at the end of 2018, it was estimated that there

were more than 3,200 active captive insurance

companies and 1,800 cells formed in the United States,

and more than 6,600 active captive insurance

companies and 3,200 cells formed in key jurisdictions

worldwide. See “U.S. Domestic Captive Domiciles as of

Year-End 2018,” attached hereto as Appendix A; and

“SRS Charts the Total Number of Active Captives for

2018,” available at www.captive.com/news/2019/02/

25/srs-charts-the-total-number-of-active-captives-for2018. This means that there are approximately 5,000

active captive risk bearing entities (captives including

cells) formed in United States jurisdictions, and

approximately 10,000 active risk bearing entities, not

all of which make the § 831(b) election, formed in key

jurisdictions worldwide as of 2018, the most recent year

for which data is currently available. Id. Assuming, on

the low end, that the several thousand captives

currently or soon to be under audit is approximately

2,000, the IRS is auditing an estimated number of

captive insurance arrangements equivalent to 40% of

the active captive risk bearing entities formed in the

United States, or 20% of the active captive risk bearing

entities formed in key worldwide jurisdictions. These

audits produce information on § 831(b) insurers at a

painstaking level of detail. See Appendix C (redacted

copy of an IRS Information Document Request form).

Further, it also should be noted that most, if not all, of

the information that the IRS seeks through compliance

with Notice 2016-66 is already available by virtue of

IRS Form 1120-PC, which each § 831(b) captive and

other property & casualty insurance companies are

presently required to file annually. See SIIA Letter to

Treasury Secretary Mnuchin Regarding Executive

Order 13789 –Identifying & Reducing Tax Regulatory

Burdens, Dated June 15, 2020, available at

http://files.constantcontact.com/9d218c3c001/05dafb545f9b-4fba-b08e-512c318af2cb.pdf.

The level of information required in these audit

request forms and 1120-PC Forms produces a far more

detailed and intricate level of information than must be

provided on the Form 8886. These audits ultimately

led to three decisions in the United States Tax Court

that decided against the taxpayer.4 Simply put, if the

IRS has not learned sufficient information to identify

an abusive transaction from its widespread audits of a

large percentage of the active captives formed

worldwide, from the 1120-PC Forms and from Tax

Court litigation, Notice 2016-66 will not make any

material difference in its regulatory efforts and

amounts to nothing more than an open-ended fishing

expedition.

In light of the extreme burden on the public and the

minimal benefit to the IRS, the Amici believe that the

actual purpose of Notice 2016-66 is not information

gathering, but rather to deter taxpayers from

participating in a lawful and beneficial industry. To

further bolster this argument, the Amici would point to

the timing of the Notice 2016-66 release. On December

18, 2015, the Protecting Americans from Tax Hikes Act

See Avrahami v. Commissioner, 149 T.C. 7 (T.C. Aug. 21, 2017),

Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86

(T.C. June 18, 2018), and Syzygy Insurance Co., Inc., et al. v.

Commissioner, T.C. Memo. 2019-34 (April 10, 2019). Reserve

Mechanical Corp. v. Commissioner is currently under appeal to the

Tenth Circuit Court of Appeals.

(the “PATH Act”) was enacted.5 The PATH Act

included revisions to § 831(b) to increase the premium

threshold to qualify for the § 831(b) deduction from

$1,200,000 to $2,200,000, with annual inflation

adjustments. The PATH Act also included revisions to

§ 831(b) to add two specific ownership diversification

requirements. These new provisions went into effect

for tax years beginning after December 31, 2016. In

the wake of this expansion of the § 831(b) premium

threshold, the IRS response was to issue Notice 201666 on November 1, 2016, in an effort to discourage

captives from taking advantage of the then soon to be

effective newly congressionally authorized expanded

deduction. Indeed, notwithstanding that Congress

gave the IRS the authority through the PATH Act to

issue guidance to help prevent abuse, the IRS has

failed to do so more than four (4) years later, despite

repeated good faith requests from the captive industry

for such guidance.

Since taking effect, Notice 2016-66 has inflicted

immediate and irreparable harm on the captive

insurance industry. Apart from the substantial burden

of compliance discussed above, Notice 2016-66

threatens to stigmatize the Amici and their members,

and intimidate legitimate businesses and citizens from

engaging in activity that Congress has expressly

declared lawful, most recently in the PATH Act and the

Joint Committee on Taxation, Technical Explanation of the

Revenue Provisions of the Protecting Americans from Tax Hikes Act

of 2015, House Amendment #2 to the Senate Amendment to H.R.

2029 (Rules Committee Print 114-40), (JCX-144-15), December 17,

2015 (hereinafter, “PATH Act”).

Consolidated Appropriations Act of 2018, Pub. L.

115–141. See the PATH Act, 129 Stat. 3106-08. The

IRS has long cast aspersions on § 831(b) captives by

including them on its annual “Dirty Dozen” list of

supposed “tax scams.” See “Internal Revenue Service,

Abusive tax shelters, trusts, conservation easements

make IRS’ 2019 ‘Dirty Dozen’ list of tax scams to avoid”

(March 19, 2019), available at www.irs.gov/newsroom/

abusive-tax-shelters-trusts-conservation-easementsmake-irs-2019-dirty-dozen-list-of-tax-scams-to-avoid.

Presumably, Congress would not have authorized

§ 831(b) if it thought that all or most uses of that

section would amount to a tax scam.6

The IRS has explained that the problem lies with

“abusive” uses of § 831(b), under which insureds pay

inappropriately high premiums or receive insurance for

harms that have little or no risk of materializing. Id.

Under Notice 2016-66, however, the IRS has declared

that essentially every captive making the § 831(b)

election, including legitimate non-abusive captives, are

subject to the reporting requirement and present “the

Approximately two months after the Supreme Court granted

certiorari to hear this case, on July 16, 2020, the IRS removed

micro-captive insurance transactions from its annual “dirty dozen”

list while promising that an upcoming series of press releases will

emphasize the illegal schemes and techniques businesses and

individuals use to avoid paying their lawful tax liability, including

such scams as abusive micro captives. See “IRS unveils ‘Dirty

Dozen’ list of tax scams for 2020; Americans urged to be vigilant to

these threats during the pandemic and its aftermath,” available at

https://www.irs.gov/newsroom/irs-unveils-dirty-dozen-list-of-taxscams-for-2020-americans-urged-to-be-vigilant-to-these-threatsduring-the-pandemic-and-its-aftermath.

potential for tax avoidance or evasion.” Id. In other

words, Notice 2016-66 casts a cloud of suspicion over

every entity insured by a § 831(b) captive, even when

it is clear that the captive provides appropriate

insurance at actuarially-justified premiums. Because

Notice 2016-66 implicates legitimate captives, it

continues to provide a clouded view of what the IRS

would consider to be proper versus improper

structures. Because of this stigma, Notice 2016-66 has

intimidated, and will continue to intimidate, taxpayers

to forego lawful activity out of fear of reprisals from the

IRS.

To compound the issue, on March 20, 2020, the IRS

sent Letter 6336 to at least fifty thousand (50,000)

taxpayers, and maybe many more. See “SIIA calls for

review of IRS’ ‘activities’ in response to Executive Order

for regulatory relief,” available at

http://www.captiveinsurancetimes.com/captiveinsur

ancenews/article.php?article_id=6905. Letter 6336

requires anyone who has taken a deduction or other tax

benefit related to micro-captive insurance on a prior

tax year return to report to the IRS, under penalty of

perjury, whether the taxpayer is still engaged in a

micro-captive insurance transaction, the last year for

which a deduction was taken and the date participation

ceased. In this letter, the IRS warned taxpayers that

it is increasing enforcement activity and that it would

take into account the taxpayer’s response, or lack

thereof, when considering future compliance-related

activity related to micro-captive insurance. Further,

the information that the IRS sought to obtain from this

Letter 6336 was duplicative and already in its

possession through the routine filing of 1120-PC

Forms.

Moreover, this Letter 6336 was issued four (4) days

into the National COVID-19 Emergency Declaration, at

a time when many businesses that own captives were

inaccessible or operating at a diminished capacity

because of the pandemic crisis. Even worse, the IRS

Letter originally required taxpayers to access and

report information about their captive insurance

programs by May 4, 2020, or face repercussions on

future compliance related activity for failing to comply.

After much pushback to Treasury Secretary Mnuchin,

the IRS extended the time to respond to Letter 6336 by

one month to June 4, 2020. With stay-at-home and

shelter-in-place orders in place for many cities and

states until the end of May or later, many of these

taxpayers may not have even been able to access their

records or professional advisors in order to comply with

the requirement within the short one-month extension,

not to mention risking their health and safety because

of the pandemic.

And perhaps most significantly, captives actually

have helped businesses by providing coverage for

business interruption claims caused by the pandemic.

While virtually all business interruption insurance

policies written in the traditional insurance

marketplace contain exclusions for COVID or similar

viruses, captives have the flexibility of designing

coverages to help businesses respond to this crisis.

And indeed, many captives have paid such claims in

the last few months, and numerous claims filings are

predicted. See “Post-COVID-19, Some Businesses May

Look to Captives for BI Solutions, Observers Say,”

available at https://media.cicaworld.com/wpcontent/uploads/2020/05/Post-COVID-19-SomeBusinesses-May-Look-to-Captives-for-BI-SolutionsObservers-Say.pdf. See also “Once Scrutinized, an

Insurance Product Becomes a Crisis Lifeline,” available

at https://www.nytimes.com/2020/03/20/yourmoney/coronavirus-insurance-small-business.html.

Collectively, the stigma and fear engendered by

Notice 2016-66, along with the substantial costs of

compliance, threaten to stifle the captive insurance

industry in many states with captive insurance laws.

The Amici estimate that a significant percentage of the

stand-alone captives licensed by the states and

ancillary jurisdictions qualify to file under § 831(b).

Consequently, if the IRS succeeds in its apparent goal

of discouraging the use of § 831(b), a significant

percentage of the captive insurance industry would be

threatened. This would not only be against the interest

of the Amici and their members, preventing businesses

from using captives as a legitimate risk management

tool; it would also be against the intent of Congress,

which passed § 831(b) and reaffirmed its use in the

PATH Act and the Consolidated Appropriations Act of

2018.

B. Notice 2016-66 has a chilling effect on

the captive insurance industry.

It appears that the actions of the IRS have started

to have their intended effect, as reports indicate that

Notice 2016-66 already has begun to affect the captive

insurance market negatively in the United States. For

example, in 2018, captives making the § 831(b) tax

election remained under the microscope, resulting in a

continued reduction in their numbers and a significant

drop in formation activity. See “SRS Charts the Total

Number of Active Captives for 2018,” available at

www.captive.com/news/2019/02/25/srs-charts-thetotal-number-of-active-captives-for-2018. Many of the

Amici’s members report that their clients have

abandoned or plan to abandon existing captives and/or

forego the creation of new ones since Notice 2016-66

took effect. Other members of the Amici have ceased

formation of any captives that utilize § 831(b) because

of the heightened scrutiny and regulatory burden

imposed by Notice 2016-66. The Amici are also aware

of multiple audits of captives or owners, many of which

can cost in excess of $250,000 to defend, especially if

litigation ensues. In light of these risks and the

clouded view of what the IRS would consider to be a

legitimate § 831(b) captive, many insurance

professionals can no longer recommend the formation

of § 831(b) captives in good faith unless their clients are

willing to embrace the substantial costs of complying

with Notice 2016-66 and the risk associated with an

audit.

II.

The APA should apply to Notice 2016-66,

and because there was no meaningful

opportunity to comment on the proposed

rule through the submission of written

data, views, or arguments, Notice 2016-66

should be declared invalid.

A. The APA serves as a conduit for public

input that permits agencies to craft the

wisest rules.

The APA provides that “[a] person suffering legal

wrong because of agency action, or adversely affected

or aggrieved by agency action within the meaning of

the relevant statute, is entitled to judicial review

thereof.” 5 U.S.C. § 702. The APA further empowers

this Court to “hold unlawful and set aside agency

action, findings, and conclusions found to be ... without

observance of procedure required by law.” 5 U.S.C.

§ 706(2)(D). Pursuant to the APA, “rules” promulgated

by an agency must be published in accordance with

notice-and-comment procedures. 5 U.S.C. § 553. An

agency’s failure to comply with notice-and-comment

procedures is grounds for invalidating the rule.7

A “rule,” for purposes of the APA, is defined so

broadly as to include virtually any statement an agency

may make. A “rule” is created when an agency makes

Neither exception to the APA’s notice-and-comment provision

applies here. The so-called “interpretive rule” and “good cause”

exceptions, authorized by 5 U.S.C. §§ 553(b)(A) and (B), (d)(l) and

(d)(3), are “narrow,” to be used only “sparingly.” Perez v. Mortgage

Bankers Ass’n, 135 S. Ct. at 1203. Moreover, the IRS did not claim

any exception with respect to Notice 2016-66.

a statement of “general or particular applicability and

future effect designed to implement, interpret, or

prescribe law or policy or describing the organization,

procedure, or practice requirements of an agency.” 5

U.S.C. § 551(4). The APA defines “rule making” as the

“process for formulating, amending, or repealing a

rule.” Id., at § 551(5).

Rules that must be promulgated according to the

APA’s notice-and-comment process are called

“legislative-type rules.” Chrysler Corp. v. Brown, 441

U.S. 281. 302 (1979) (referring to non- interpretative

rules as “substantive” or “legislative-type” rules). For

the purposes of the APA, there is a distinction between

legislative rules and interpretive rules. Although there

is no bright line differentiating legislative from

interpretive rules, courts have provided some broad

guidance. See Friedrich v. Secretary of Health &

Human Servs., 894 F.2d 829, 834 (6th Cir. 1990). “An

interpretative rule simply states what the

administrative agency thinks the statute means, and

only ‘reminds’ affected parties of existing duties. ... On

the other hand, if by its action the agency intends to

create new law, rights or duties, the rule is properly

considered to be a legislative rule.” General Motors

Corp. v. Ruckelshaus, 742 F.2d 1561, 1565 (D.C. Cir.

1984) (as adopted by the Sixth Circuit in Friedrich, 894

F.2d at 834).

Generally, a legislative rule is “one affecting

individual rights and obligations,” whereas an

“interpretive rule is a general statement of policy [that]

advise[s] the public of the agency’s construction of the

statutes and rules which it administers.” Chrysler

Corp., 441 U.S. at 302, n. 31 (citing the Attorney

General’s Manual on the APA). “The difference

between legislative and interpretative rules has to do

in part with the authority (law-making versus lawinterpreting) under which the rule is promulgated.”

Dismas Charities, Inc. v. United States Department of

Justice, 401 F.3d 666, 679 (6th Cir.2005) (citations

omitted). “For purposes of the APA, substantive rules

are rules that create law, while in contrast interpretive

rules merely clarify or explain existing law or

regulations and go to what the administrative officer

thinks the statute or regulation means.” Id. (quoting

First National Bank v. Sanders, 946 F.2d 1185, 118889 (6th Cir. 1991)).

In other words, if the rule has an “actual legal

effect,” it is a legislative rule. Ohio Coal Ass’n v. Perez,

S.D. Ohio No. 2: l 4-cv-2646, 2016 U.S. Dist. LEXIS

78655, at *53 (June 16, 2016) (quoting Nat’l Mining

Ass’n v. McCarthy, 758 F.3d 243, 252 (D.C. Cir. 2014)).

A rule has legal effect when, “in the absence of the

rule[,] there would not be an adequate legislative basis

for enforcement action or other agency action to confer

benefits or ensure the performance of duties.” Id. at

*54 (quoting Am. Mining Cong. v. Mine Safety &

Health Admin., 995 F.2d 1106, 1112, 302 U.S. App.

D.C. 38 (D.C. Cir. 1993)).

Interpretive rules are statements as to what an

agency thinks a statute or regulation means; it is not

binding on a court, only on an agency. Dismas

Charities, Inc., at 681. Regardless of the precise

language, the basic distinction is this: whereas a

legislative rule requires something new of those the

rule affects, an interpretive rule merely restates

existing duties, albeit slightly differently or clearer

than originally stated by the statute or regulation.

Fertilizer Institute v. United States Environmental

Protection Agency, 935 F.2d 1303, 1307-08 (D.C. Cir.

1991); United States v. Picciotto, 875 F.2d 345, 347-48

(D.C. Cir. 1989) (“rules that merely restate existing

duties” are interpretive).

Under the APA, when an agency proposes a new

rule that is not merely interpretive in nature, it must

comply with a four-step notice-and-comment procedure.

See Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199,

1203 (2015).

The APA’s four-step notice-and-comment regime

requires the following:

(a)

First, the agency must issue a “general notice

of proposed rulemaking” that shall be

published in the Federal Register (5 U.S.C.

§553(b)) “not less than 30 days before its

effective date.” Id.

(b)

Second, “the agency shall give interested

persons an opportunity to participate in the

rule-making through submission of written

data, views or arguments.” Id. at § 553(c).

(c)

Third, the agency “must consider and

respond to significant comments received

during the period for public comment.” See

Perez, at 1203.

(d)

Fourth, when the agency files the final rule,

it shall include in the rule’s text “a concise

general statement of [its] basis and purpose.”

5 U.S.C. § 553(c).

Notice 2016-66 is a legislative rule, not an

interpretive rule. It does much more than restate

existing duties; it creates duties where none existed.

Prior to Notice 2016-66, participating in or being a

material advisor to a micro-captive transaction did not

trigger the duties required of those who engage in

reportable transactions. It does not simply “interpret”

a statute or regulation. Rather, it imposes substantial

new responsibilities upon taxpayers, under penal

threat. Only because of Notice 2016-66 do reportable

transaction duties fall on those who participate in or

are material advisors to § 831(b) captive transactions.

Thus, Notice 2016-66 is a legislative rule.

Congress gave the IRS the power to define

“reportable transactions,” and only through the proper

exercise of that power do the duties and potential

penalties associated with such transactions apply.

Thus, it has legal effect; without it, there would be no

reportable transactions due to the government and no

basis for enforcement. Stated another way, without

Notice 2016-66 “there would not be an adequate

legislative basis for enforcement or other agency

action” against those who participate in or who are

material advisors to § 831(b) captive transactions. See

Id., American Min. Congress, 995 F.2d at 1112.

Although Notice 2016-66 included a mechanism for

the public to comment on how micro-captive

transactions “might be addressed in [future] published

guidance,” those comments were requested “on or

before January 30, 2017.” Thus, any future published

guidance would be of no use to taxpayers required to

comply before that deadline. Notice 2017-08, issued on

December 29, 2016, extended the filing date to May 1,

2017, but it added nothing further with respect to

public comment.

Although a number of trade

associations and individuals, including several of the

Amici, submitted comments to the IRS regarding

Notice 2016-66, they were not acknowledged, and such

comments had no effect whatsoever on the regulatory

paradigm outlined therein. As such, the IRS did not

follow in any way the APA’s public “notice and

comment” provisions before issuing Notice 2016-66,

making the publication of Notice 2016-66 both

arbitrary and capricious.

As courts have made clear, notice-and-comment

rulemaking serves a critical purpose in our political

system: it serves as a conduit for public input in order

for agencies to craft the wisest rules.

Dismas

Charities, Inc., at 680. That purpose is not served

when the agency unilaterally decides what the rule is;

instead, when making a rule, the agency should be

trying to determine what the wisest rule is. Id.

B. While recognizing that not all § 831(b)

transactions are abusive, Notice 2016-66

arbitrarily and capriciously applies to

essentially all § 831(b) transactions,

even though the IRS admits its lack of

information regarding the captive

insurance industry.

In Notice 2016-66, the IRS acknowledged its lack of

information regarding § 831(b) captive transactions:

“the Treasury Department and the IRS lack sufficient

information to identify which § 831(b) arrangements

should be identified specifically as a tax avoidance

transaction and may lack sufficient information to

define the characteristics that distinguish the tax

avoidance transactions from other § 831(b) relatedparty transactions.” Notice 2016-66, Introduction. Had

the IRS proceeded through the notice-and-comment

process, it could have gathered much, if not all, of the

information it lacks. Or it would have been alerted to

the onerous and unnecessary financial costs associated

with, and reputational damage caused by, making

virtually all § 831(b) captive dealings reportable

transactions. A proper regulatory decision ought to be

based upon the comments submitted and the actual

facts and information gathered as part of the notice

and comment process, as part of a transparent

regulatory system. Instead, the IRS chose to act first

and ask questions later.

Despite the regulation of captives by the United

States captive jurisdictions through numerous

insurance industry experts and professionals, and

despite failing to proceed through the notice-andcomment process, the IRS stated unequivocally that,

with regard to captives making the § 831(b) election,

“[t]he manner in which the contracts are interpreted,

administered, and applied is inconsistent with arm’s

length transactions and sound business practices,”

thereby effectively subjecting all captives making the

§ 831(b) election subject to Notice 2016-66. See Notice

2016-66. This type of broad, blanket aspersion about

captives making the § 831(b) election completely

supplants the judgment of numerous insurance

industry experts and professionals in the United States

captive jurisdictions when licensing and regulating

captives.

Members of the captive industry submitted

substantial comments on the PATH Act and Notice

2016-66, both before and after the issuance of Notice

2016-66. See, e.g., Letter from SIIA to the IRS, dated

October

17,

2016,

available

https://www.siia.org/files/0f5af4a0-5c12-4dc5-aa0eb3cd6d9cfd08.pdf, which requested guidance on the

PATH Act; and the SIIA Comment Letter to the Acting

Secretary of the Treasury and the IRS Commissioner,

dated January 30, 2017, available at

https://www.siia.org/files/News/Notice_2016-66__SIIA_Comment_Letter_-_Final_.pdf. Even captive

insurance regulators submitted comments on Notice

2016-66. See Appendix B, in which the Utah

Insurance Commissioner submitted comments to the

IRS regarding the burden of Notice 2016-66 on the

captive insurance industry. Unfortunately, these

comments, along with those of many other interested

taxpayers, did not become a part of any rule-making

process; they simply fell upon deaf ears. The IRS failed

to respond to any of these comments. Had the IRS gone

through the notice-and-comment process, the IRS

would have had the opportunity to engage with the

captive insurance industry to acquire the information

the IRS admits that they lack.

Interestingly, in issuing Notice 2015-74, the IRS

recognized the value of state regulators. See Notice

2015-74, available at www.irs.gov/pub/irs-drop/n-1574.pdf. In Notice 2015-74, the IRS stated that certain

exotic financial arrangements designed to convert

short-term capital gain and/or ordinary income into

long-term capital gain through contractual

manipulations (“basket contracts”) were “transactions

of interest.” However, Notice 2015-74 excluded basket

contracts that are “subject to regulations by a

comparable regulator.” Id. By issuing Notice 2016-66,

the IRS essentially disregarded the comments of state

insurance commissioners and supplanted the role of

the state Departments of Insurance as regulators of the

captive industry. Notwithstanding that Notice 2015-74

excluded “transactions of interest” that were otherwise

subject to regulation, by issuing Notice 2016-66, the

IRS seemingly chose to act in a completely arbitrary

and capricious manner by admitting that it did not

have sufficient information to identify which § 831(b)

arrangements should be identified specifically as tax

avoidance transactions, while ignoring comments from

the captive insurance industry and state insurance

commissioners and simultaneously targeting all

captives making the § 831(b) election.

III.

Information gathering is a phase of tax

administration procedure that occurs

before the assessment of a tax, and the AIA

should not apply.

The AIA provides that “no suit for the purpose of

restraining the assessment or collection of any tax shall

be maintained in any court by any person, whether or

not such person is the person against whom such tax

was assessed.” 26 U.S.C. § 7421(a). This statute

“protects the Government’s ability to collect a

consistent stream of revenue, by barring litigation to

enjoin or otherwise obstruct the collection of taxes.

Because of the AIA, taxes can ordinarily be challenged

only after they are paid, by suing for a refund.” Nat’l

Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 543

(2012), citing Enochs v. Williams Packing & Nav. Co.,

370 U.S. 1, 7–8 (1962).

The present challenge to Notice 2016-66 by the

Petitioner seeks to restrain the requirement to report

information to the IRS before a taxpayer or material

advisor has become subject to any civil or criminal

penalties simply for failure to comply with Notice 201666. The District Court and the Sixth Circuit Court of

Appeals ruled that the Internal Revenue Code treats

the penalty for not complying with Notice 2016-66 as a

tax, and that the AIA therefore bars this suit. See CIC

Services, LLC v. IRS, 2017 WL 5015510 (E.D.

Tennessee), CIC Services, LLC v. IRS, 925 F.3d 247

(6th Cir. 2019); CIC Services, LLC v. IRS, 936 F.3d 501

(6th Cir. 2019).

The Amici believe that the text of the case law on

the pertinent statutes suggests otherwise. The AIA

applies to suits “for the purpose of restraining the

assessment or collection of any tax.” 26 U.S.C.

§ 7421(a). In the present case, the Plaintiff does not

seek to enjoin the enforcement of a tax, but rather to

enjoin the IRS from information gathering pursuant to

the requirements of 26 U.S.C. §§ 6111 and 6112 of the

Internal Revenue Code. 26 U.S.C. §§ 6111 and 6112

cannot rightly be described as either a tax or a penalty,

but as statutes requiring the gathering of information.

Congress can describe something as a penalty but

direct that it nonetheless be treated as a tax for

purposes of the AIA. See Sebelius, 567 U.S. at 544. For

example, 26 U.S.C. § 6671(a) provides that “any

reference in this title to ‘tax’ imposed by this title shall

be deemed also to refer to the penalties and liabilities

provided by” subchapter 68B of the Internal Revenue

Code. Id. “Penalties in subchapter 68B are thus

treated as taxes under Title 26, which includes the

Anti-Injunction Act.” See id., at 544-545. However, the

requirement to gather information found in 26 U.S.C.

§§ 6111 and 6112 is not in subchapter 68B of the Code.

Nor does any other provision state that references to

taxes in Title 26 shall also be deemed to apply to the

requirement to gather information pursuant to 26

U.S.C. §§ 6111 and 6112. As the Supreme Court

explained in Direct Marketing, “information gathering”

such as the requirement to provide information

pursuant to Notice 2016-66 is “a phase of tax

administration procedure that occurs before

assessment … or collection.” See Direct Mktg. 135 S.

Ct. at 1129-31 (2015).8

The Amici urge the Court to rule in favor of the

Plaintiff on the basis Judge Nalbandian stated in his

dissent in CIC Services, LLC v. IRS, 925 F.3d 247 (6th

Cir. 2019). “[A] suit to enjoin the enforcement of a

reporting requirement is not a ‘suit for the purpose of

restraining the assessment or collection of any tax,’ 26

U.S.C. § 7421(a), … because the tax does not result

To support this narrow reading of the AIA, the Amici draw an

analogy between this situation and the one presented in Dep’t of

Homeland Sec. v. Regents of the Univ. of Cal., 591 U.S. ___ (2020).

In that recent case, the Court narrowly construed 8 U.S.C.

§ 1252(b)(9) and (g) to allow review of an agency action under the

APA.

from the reporting requirement per se.” CIC Services,

LLC v. IRS, 925 F.3d 247, 259-261 (6th Cir. 2019)

(Nalbandian, J., dissenting). “The only way for the IRS

to assess and collect the tax is for a party to violate the

[reporting] requirement. So enjoining the [reporting]

requirement only stops the assessment and collection

of the tax in the sense that a party cannot first violate

the [reporting] requirement and then become liable for

the tax.” See id., at 261. To add to this point, the

Amici are unaware of any captive or material advisor

being penalized for failing to comply with Notice 201666. As such, there are currently no known penalties

owing to the IRS that could be enjoined.

CONCLUSION

For the foregoing reasons, the Amici urge the Court

to review closely the validity of the issuance of Notice

2016-66. The Amici filing this brief, while offering no

opinion on any other particular facts or structure of

any insurance program at issue or otherwise, believe

the IRS did not allow a meaningful opportunity to

comment on Notice 2016-66 and failed to respond to the

following significant industry concerns:

Impact of Notice 2016-66 on the Captive

Insurance Industry:

A. Notice 2016-66 imposes a heavy burden on

the public and causes ongoing irreparable harm to the

captive insurance industry and its stakeholders; and

B. Notice 2016-66 has a chilling effect on the

captive industry.

II.

The APA should apply to Notice 2016-66, and

because there was no meaningful opportunity to

comment on the proposed rule through the submission

of written data, views, or arguments, Notice 2016-66

should be declared invalid:

The APA serves as a conduit for public

input that permits agencies to craft the wisest rules;

and

B. While recognizing that not all § 831(b)

transactions are abusive, Notice 2016-66 arbitrarily

and capriciously applies to essentially all § 831(b)

transactions, even though the IRS admits its lack of

information regarding the captive insurance industry.

III.

Information gathering is a phase of tax

administration procedure that occurs before the

assessment of a tax, and the AIA should not apply.

Respectfully submitted,

WILLIAM YOUNG WEBB

K. SCOTT HAMILTON

Of Counsel

Counsel of Record

WEBB & MORTON, PLLC KEVIN DOHERTY

910 N. Sandhills

TONY GREER

Boulevard

DICKINSON WRIGHT PLLC

Aberdeen, NC 28315

500 Woodward Avenue

(910) 944-9555

Suite 4000

Detroit, MI 48226

(313) 223-3500

KHamilton@dickinson-wright.com

Counsel for Amici Curiae

Dated: July 22, 2020

APPENDIX

TABLE OF CONTENTS

Appendix A U.S. Captive Domiciles . . . . . . . . App. 1

Appendix B Letter from the State of Utah

Insurance Department to the

Honorable John Koskinen dated

January 27, 2017 . . . . . . . . . . . . . App. 3

Appendix C Audit Document Request . . . . . . . App. 7

App. 1

APPENDIX A

See Image Next Page

App. 2

App. 3

APPENDIX B

January 17, 2017

The Honorable John Koskinen

Commissioner

Internal Revenue Service

1500 Pennsylvania Avenue, NW

Washington, D.C. 20224

Dear Mr. Koskinen,

I write today regarding IRS Notice 2016-66 (“the

Notice”) issued on November 1st of this year. The Notice

labels most captive insurance arrangements that make

the tax § 26 U.S.C. 831(b) election as “transactions of

interest” and subject to new requirements and

penalties. Because of the increased burden on small

business, statutory ambiguity, absence of regulatory

guidance and negative impacts the Notice has on

taxpayers in Utah, we respectfully request the Notice

be retracted.

App. 4

The captive industry is an important industry for Utah.

Utah regulates over 500 captive insurance entities,

many of which take the §831(b) election and would be

subject to the Notice. The Utah Insurance Department

follows the captive regulatory framework standards set

out by the National Association of Insurance

Commissioners. Each Utah captive must meet and

maintain State-established capital, surplus, and

reserve requirements, and is required to have an

annual audit by an approved independent CPA firm

and an annual actuarial review by an approved

independent actuary. Additionally, Utah domiciled

captive insurers are required to be managed only by

approved management firms, and prides itself on

having a tough but fair regulatory environment for all

businesses.

I believe the Notice will negatively affect wellintentioned taxpayers that are trying to follow all of

the rules. The Notice will have a chilling effect on small

businesses that wish to manage their risks through a

captive insurer, just like their larger Fortune 500 sized

competitors do. While we understand the IRS’ need to

identify and stop tax avoidance schemes, it is our hope

that the Service can collect this information in a less

burdensome manner or retract this Notice entirely and

use the significant amount of data it has already

collected.

In December 2015, I was fortunate to work with

Senator Hatch’s Office when Congress changed the

§831(b) tax law by increasing the premium threshold

and adding new requirements aimed at restricting

ownership options and limiting estate planning. As

App. 5

part of this, Congress specifically requested Treasury

and the IRS write reporting guidance so the captive

insurance industry will be able to comply with the new

requirements, which took effect January 1, 2017.

Nearly a year later, no such guidance was issued.

While the captive industry has yet to receive this

guidance, it concerns us even more that the IRS took

the additional step of issuing the Notice without

gauging the impact of the recent legislative changes or

providing guidance.

The immediate issue is that thousands of taxpayers

who are owners of small and medium-sized business

will be subjected to additional financial and regulatory

burdens under the Notice’s required compliance filings

with significant non-compliance penalties.

Furthermore, the vast majority of data requested has

already been reported to the IRS through the normal

tax filing process and other Information Document

Requests (IDRs). Requesting duplicative information

already in the IRS’s possession through multiple

sources, and in such a short timeframe, seems

unreasonable to my constituents, and other taxpayers.

Since the Service needs to update the annual insurance

company tax return forms anyway to collect the

ownership information required as part of the

December 2015 law change, I suggest that the better

solution is that the Service considers using this

opportunity to request on the updated tax return any

additional information that it deems necessary to

identify abuse. This approach avoids taxpayers having

to provide the same information twice to the Service,

avoids subjecting rule abiding business owners to

App. 6

arduous new requirements, and allows the Service to

collect any information it deems needed to identify

abuse. After the Service reviews the tax return

information, if further action is warranted, then that is

a more appropriate time to issue a narrowly tailored

Notice focused on specific abuses.

On behalf of impacted business owners, I respectfully

request retraction of Notice 2016-66.

Thank you in advance for your consideration, please

contact Travis Wegkamp, Captive Insurance Director,

in my office should you wish to discuss further. He may

be reached directly by phone at 801-537-9294 or email

at twegkamp@utah.gov.

Sincerely,

s/________________________

TODD E. KISER

Insurance Commissioner

cc: Sen. Orrin Hatch

Sen. Mike Lee

Rep. Rob Bishop

Rep. Jason Chaffetz

Rep. Mia Love

Rep. Chris Stewart

App. 7

APPENDIX C

Description of documents requested

Tax Period(s):

201112

*Please be advised that the 2012 tax return has been

picked up for exam*

Provide the·following documentation for tax years 2011

and 2012.

Part I – Instructions and Definitions

Instructions

In responding to this Information Document Request

(“IDR”), all requests for documents should be construed

expansively rather than narrowly. All documents

produced should include all attachments, exhibits,

addendums, and appendices.

If XXXXXXXX does not produce a requested document,

it should state the efforts made to locate the requested

document. In addition, XXXXXXXX must state whether

App. 8

the requested document ever existed, existed but was

destroyed, or existed but was misplaced.

Please provide all hard copy documents and

Electronically Stored Information (ESI) formatted for

Concordance/Opticon. All documents originating from

hard copy should be produced as TIFF or JPG named

and branded with the Bates number. All ESI sourced

documents (e.g. Email, Microsoft Word, Excel,

PowerPoint, etc.) should be provided as both Bates

branded TIFF or JPG and in “native” format named

according to Bates number. Provide E-mails or other

documents with embedded attachments linked in a way

that makes it clear that the documents are related.

Documents should be de-duplicated and produced in

color where necessary, with custodian, source and other

information included as described in the attached

addendum. Please remove any password protection or

encryption from the individual files, or provide any

passwords, encryption keys or certificates necessary to

view the files.

These documents may be produced in read-only form on

CD, DVD, or hard drive. To ensure readability of any

requested document in electronic format, provide the

PDF or TIFF files with an image resolution of at least

300 dots per inch (dpi). To the extent that any

electronic indexes or other listings relating to the

requested documents are created in preparation for

submitting them to the Internal Revenue Service,

please provide that information with your response to

assist in organizing and reviewing the documents.

The attached

guidelines.

addendum

provides

additional

App. 9

Definitions

The following definitions apply to this IDR:

a. For the purpose of this request, the words

“documents,” “records” or “data” refer to any

materials of any kind that are written, printed,

typed, reproduced graphically, visually, aurally,

electronically, or by any other means, including

but not limited to:

• Contracts, agreements, plans, papers,

summaries, opinions, reports, commentaries,

communications, correspondence,

memoranda, minutes, notes, comments,

messages, studies, graphs, diagrams,

photographs, charts, projections, tabulations,

analyses, questionnaires and responses, work

papers, data sheets, statistical or

informational accumulations, computer

databases, computer disks and formats, data

processing cards or worksheets, telexes,

telegrams, teletypes, cables, facsimiles,

instant messages, voice mail, and similar and