On Friday, April 21, a District Court judge denied a taxpayer’s request Summary Judgement for a preliminary injunction to prohibit the IRS from enforcing the disclosure requirements set forth in Notice 2016-66. The Court’s ruling comes on the heels of the May 1st disclosure deadline the IRS has imposed on IRC § 831(b) captive insurance companies, their insureds, owners of the insureds, and material advisors to the transactions.
On November 1, 2016, the IRS issued the Notice 2016-66, which makes most IRC § 831(b) captive insurance arrangements, “transactions of interest,” which requires those involved to file yearly detailed disclosure statements with the IRS. The original due date for these disclosures was January 30, 2017. However, Notice 2017-08 pushed this deadline to May 1, 2017.
Notice 2016-66 generally requires captive insurance companies, their insureds, and owners of the insureds, to file Forms 8886 pertaining to the captive insurance arrangement if the captive has made loans or other tax-free transfers of capital to a shareholder or if insured losses and claim expenses amount to less than 70 percent of premiums received by the captive over a 5-year period.
Material Advisors that meet specified requirements must file Forms 8918. The term “Material Advisor” is broad and includes those that meet income thresholds and make tax statements to participants in IRC § 831(b) transactions.
The Plaintiffs in the case sought to enjoin the IRS from enforcing these disclosure requirements. The Plaintiffs claimed that as Material Advisors they would suffer irreparable harm as they would likely expend over $60,000 a year in complying with the disclosure requirements of the Notice. The Plaintiffs also argued that the Notice 1) is a legislative type rule that failed to meet the Administrative Procedures Act notice-and-comment requirements, 2) is arbitrary and capricious, and 3) fails to meet the requirements of the Congressional Review of Agency Rule-Making Act because the IRS failed to submit the Notice to Congress and the Comptroller General.
The Court, while admitting that Plaintiffs will suffer at least some irreparable harm, sided with the Government, holding that the Court does not have subject-matter jurisdiction to issue an injunction. The Court relied on the Anti-Injunction Act, which prohibits injunction suits for the purpose of preventing the assessment or collection of tax. The Court held that because the Notice imposes reporting requirements and penalties for non-compliance, it cannot issue an injunction under the Anti-Injunction Act. Therefore, the Plaintiff’s Motion for Summary Judgement was denied, and the IRS is not prevented from enforcing Notice 2016-66.
As a result, at least as of the date of this document, all Forms 8918 and 8886 remain due to the IRS Office of Tax Shelter Analysis by May 1. Because the penalties for failing to file a complete disclosure are so severe, it is important that the forms be completed with care and expert guidance. Please contact Steven Miller at (202) 888-7023 should you have any questions about these forms or your specific disclosure requirements.