Court Declares IRS Micro-Captive Notice 2016-66 Unlawful: What Taxpayers Should Do Now

Published date30 March 2022
Subject MatterGovernment, Public Sector, Litigation, Mediation & Arbitration, Tax, Compliance, Constitutional & Administrative Law, Trials & Appeals & Compensation, Tax Authorities
Law FirmFreeman Law
AuthorMr Matthew Roberts


On May 17, 2021, the United States Supreme Court handed the IRS a significant loss when it concluded that CIC Services, LLC ("CIC") could continue its lawsuit against the IRS for violations of the Administrative Procedure Act ("APA"). A summary of the Supreme Court's decision in CIC Services can be found here.

Although CIC won the battle, it had not yet won the war. Rather, CIC won on procedural grounds when the Supreme Court held that the Anti-Injunction Act did not foreclose the federal courts from reviewing its merit-based APA challenge. Accordingly, CIC was required to continue its fight against the IRS to prove that the IRS had failed to comply with the APA. The case was therefore remanded back to the United States District Court for the Eastern District of Tennessee ("Federal Court") for a decision on the merits.

But prior to the Federal Court reaching a decision on the APA issue, things really got interesting. Specifically, on March 3, 2022, the Sixth Circuit Court of Appeals (the court in which CIC's appeal would lie) rendered its decision in Mann Construction, Inc. v. United States, No. 21-1500 (6th Cir. Mar. 3, 2022). More on that case is here. In that case, the Sixth Circuit held that another IRS Notice'Notice 2007-83'was invalid because the IRS failed to comply with the notice-and-comment procedures of the APA.

A few weeks after Mann Construction was decided, the Federal Court issued its decision in CIC Services, LLC v. IRS, No. 3:17-cv-110 (E.D. Tenn. Mar. 21, 2022). This article discusses that decision.

The Federal Court Finds the Notice is Unlawful.

CIC raised two arguments in its summary judgment motion regarding the lawfulness of the Notice. First, CIC contended that the Notice must be set aside under the APA because it was a "legislative rule," which required notice-and-comment procedures. Second, and alternatively, CIC contended that the Notice was unlawful because the IRS had acted arbitrarily and capriciously in issuing the Notice.

The Federal Court agreed with CIC on both points. As an initial matter, the Federal Court spent little time in concluding that the Notice was a legislative rule'rather than an "interpretative rule," as argued by the IRS, particularly in light of the Sixth Circuit's recent decision in Mann Construction. And similar to the decision in Mann Construction, the Federal Court held that the IRS had failed to follow the required notice-and-comment procedures for implementation of the legislative rule.


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