Tennessee
03 November 2017
Reporter: Barney Dixon

CIC and Ryan lose battle against IRS


Captive manager CIC Services and Texas-based tax firm Ryan have lost their battle with the Internal Revenue Service (IRS) after a Tennessee judge dismissed their case.

In the ruling, handed down at the US District Court for the Eastern District of Tennessee, Judge Travis McDonough granted the IRS’s motion to dismiss. He explained that a ruling in CIC and Ryan’s favour would “restrain the IRS’s assessment or collection of taxes”.

CIC and Ryan’s requested injunction operates “as a challenge to both the reporting requirement and the penalty or tax imposed for failure to comply with the reporting requirement”.

In their initial complaint, CIC and Ryan had accused the IRS of unfairly labelling them as tax avoiders in Notice 2016-66 on captive insurance companies.

It requested for an injunction to delay Notice 2016-66 for micro captives.

The IRS’s notice expressed concern that micro captive transactions had the potential for tax avoidance or evasion.

It had demanded “persons entering into these transactions on or after 2 November 2006 must disclose the transaction to the IRS”.

The notice also forced taxpayers and material advisors “to file a disclosure statement regarding these transactions prior to January 30, 2017, and that persons who fail to make required disclosures ‘may be subject to . . . penalty’”.

CIC and Ryan said that the notice constitutes a “legislative-type rule” that “fails to comply with mandatory notice-and-comment requirements under the Administrative Procedures Act”, and requested a preliminary injunction that would stop the IRS from enforcing the notice’s requirements.

However, in April, the court denied CIC and Ryan’s request for an injunction.

In August, the US Tax Court backed the IRS in a dispute with Benyamin and Orna Avrahami over their micro captive, Feedback.

Judge Mark Holmes ruled that payments made to the Avrahamis by their micro captive fell outside of the scope of certain tax elections.

Holmes said that the pooling entity was not a bona fide insurance company and the captive did not operate like an insurance company because it issued policies with unclear and contradictory terms, as well as charging unreasonable premiums.

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