How the captive insurance industry got its groove on

The US Supreme Court ruled on May 17 2021, that the Anti-Injunction Act (AIA) did not prevent a lawsuit by captive manager CIC Services challenging the validity of Internal Revenue Service (IRS) Notice 2016-66, which imposes significant filing burdens on captive managers and other material advisers to captive insurance company owners.

The court reversed and remanded CIC Services v IRS to the trial court, the US District Court in Knoxville, Tennessee, where it is now being tried. Originally, the trial court had ruled in favour of the IRS on the basis that the AIA barred this lawsuit prior to the payment of any relevant federal tax, and the US Court of Appeals for the Sixth Circuit affirmed, setting up the Supreme Court showdown.

Although the focus of the CIC case was compliance with a burdensome reporting regime (the Notice), rather than the fundamental federal tax issue of risk distribution, it nevertheless offered an interesting opportunity for the captive industry to work together in a meaningful way.

The IRS has had a string of victories against taxpayers in recent years, including Avrahami, Reserve Mechanical, and Caylor, although most would argue that the fact scenarios in those cases were quite bad in any event for the taxpayers.

However, this case centred on something entirely different, namely tax reporting requirements and whether the IRS can require compliance with the Notice.

Once this lawsuit was filed by CIC, many in the industry began discussing whether—or how—they could support this effort. There had been numerous efforts in some of the other risk distribution cases to collect partners to support one or more amicus (“friends of the court”) briefs to the court, in support of the captive or a related taxpayer involved in litigation with the IRS.

However, these cases affected only the captive insurance industry and whether captives could be considered insurance companies for tax purposes. They did not have a wider audience outside the captive industry that was interested in, or potentially affected by, their outcome.

Because this case involved the AIA, the Administrative Procedure Act (APA), and the overall ability and methods by which the IRS conducted business and issued Notices such as Notice 2016-66, this case potentially had much broader interest.

Nevertheless, the audience interested in supporting CIC by filing an amicus brief remained small until CIC appealed its case and filed a petition for certiorari with the Supreme Court on January 17, 2020, to hear the case and reverse the Sixth Circuit.

At this point, the captive insurance industry became interested and began working in earnest on an amicus brief in support of CIC.

The North Carolina Captive Insurance Association took the lead and asked the Tennessee Captive Insurance Association to be involved. They also asked me and my colleague Tony Greer to assist with the drafting of an amicus brief.

Ultimately, we were joined by the captive insurance associations in Oklahoma, Kentucky, and Missouri. We tried to solicit support from other captive associations, but we filed our first amicus brief with support from just these five associations.

We considered this to be significant support for our effort. Of course, each captive association that ultimately agreed to support the amicus brief had to have internal discussions and deliberations among its board members before agreeing to move forward.

This first brief was based on three primary arguments: first, that the IRS had violated the APA by not allowing adequate “notice and comment” from the public regarding the Notice; second, that the AIA did not prohibit the lawsuit moving forward because it was not filed for the purpose of preventing or restraining the collection of a tax; and third, that the Notice imposed substantial burdens on the captive industry, with little or no benefit to the IRS, which would be able to collect any necessary taxpayer information through the normal process of tax filings.

At this point, we believed we had good arguments, and we spent time and effort developing them as fully as we could within the word limit required by the Supreme Court. But getting a grant of certiorari from the Supreme Court is always a long shot.

The Supreme Court normally grants only about 70 or 80 of these petitions each year, which is only about 1 percent of the total number that are filed.

The Supreme Court granted certiorari on May 4, 2020, and at this point we knew there was at least a good chance of prevailing on the merits. In addition, with the certainty that the Supreme Court would hear the case, there was renewed interest in a second amicus brief, this time on the merits.

At this point, we decided to reach out to every captive insurance association in the country to support our effort. But we did not have a great deal of time. The brief on the merits was due on July 22, 2020, which was only about 10 weeks away. We were also dealing with the fact that the world had shut down because of COVID-19 since the filing of the petition for certiorari back in January.

It was essential that we set up a strict schedule to meet the filing deadline. We had no choice but to begin drafting while contacting and talking to captive associations across the country at the same time.

Because of the pandemic, we were limited to working from our homes. We scheduled regular Zoom calls to make sure that every participant had an opportunity to contribute to the brief. At the same time, we worked to make sure that the captive industry was united behind this effort.

Ultimately, almost every captive insurance association in the country signed on to the effort, including the Captive Insurance Companies Association and the Self-Insurance Institute of America, the two prominent non-domicile specific associations.

In addition to North Carolina, Tennessee, Oklahoma, Kentucky, and Missouri, the state associations included Alabama, Arizona, Connecticut, Delaware, Washington DC, Georgia, Hawaii, Montana, Nevada, New Jersey, Puerto Rico, South Carolina, Texas, US Virgin Islands, and Vermont.

Not only did this include all the major and minor captive domiciles, but also the vast majority of the US—important for casual observers (and potentially a Supreme Court Justice), who may not be familiar with the captive insurance industry.