Court Denies CIC Services Attorneys’ Fees in IRS Notice Spat

A Tennessee federal court held that a micro-captive insurance adviser isn’t entitled to attorneys’ fees stemming from its dispute over an IRS notice, agreeing with a magistrate judge that the agency was justified in its positions.

The US District Court for the Eastern District of Tennessee overruled an objection from CIC Services LLC on Sept. 8. CIC Services had been fighting to obtain the fees after taking part in a long-running dispute that was allowed to proceed by the US Supreme Court and resulting in the district court tossing IRS Notice 2016-66.

In July, Magistrate Judge Jill E. McCook sided with the IRS over attorneys’ fees, recommending that they shouldn’t be awarded to CIC Services because the IRS hadn’t violated court precedent when it announced that the notice didn’t have to go through the notice-and-comment process required by the Administrative Procedure Act. Fees are typically awarded to litigants who are successful against the government unless the government’s position was “substantially justified,” the court said.

Notice 2016-66 required taxpayers to report micro-captive insurance arrangements, which the IRS believed had the potential for tax evasion.

The district court adopted the report, shooting down arguments from CIC Services that the magistrate judge failed to apply the “full weight” of the court’s finding that the notice was arbitrary and capricious and improperly focused on the IRS’s litigation positions over its behavior in circulating the notice.

The court determined its ruling on the “dearth of relevant data” justifying the IRS’s decision to designate micro-captives as a “transaction of interest” because of their potential as abusive tax structures.

“Despite the fact that the IRS failed to examine relevant facts and data to support its conclusion and subsequent issuance of Notice 2016-66 in violation of the APA, the Court acknowledged that ‘the IRS may ultimately be correct that micro-captive insurance arrangements have the potential for tax avoidance or evasion,’” said US District Judge Travis R. McDonough in the opinion.

The district court also stated that the attorneys’ fees didn’t have to be awarded, because the IRS had shown that its position as a whole toward circulating the notice was “substantially justified,” noting precedent by the US Court of Appeals for the Sixth Circuit.

Lazarus & Associates, the Adam Webber Law Group, and Gentry, Tipton & McLemore PC represented CIC Services.

The case is CIC Services, LLC. v. IRS, E.D. Tenn., No. 3:17-cv-110, 9/8/23.