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Update: Micro-Captive Transaction Disclosures

June 10, 2022

In a March 21, 2022 decision, the US District Court vacated IRS Notice 2016-66 that identified certain micro-captive transactions as "Transactions of Interest." For the past five years, Notice 2016-66 required disclosure on Form 8886, Reportable Transaction Disclosure Statement, by taxpayers involved in micro-captive transactions or other substantially similar arrangements.

The case, CIC Services LLC v. IRS[1], followed another IRS loss, holding that the IRS must abide by the notice and comment procedures of the Administrative Procedures Act (APA) when identifying disclosable transactions.[2] In addition to vacating the notice under the APA, the court also ordered the IRS to return all documents delivered pursuant to the notice. 

More Recent Developments

The IRS did not exercise its right to appeal the decision to vacate Notice 2016-66. However, the IRS successfully motioned the District Court's order to avoid returning all documents to taxpayers. The order in favor of the IRS was limited to returning documents and did not reverse the previous decision to vacate Notice 2016-66.

Now that the IRS' appeal rights have lapsed, we believe Notice 2016-66 disclosure requirements are no longer enforceable. Because the IRS did not exercise its right to appeal the CIC decision, we believe that the provisions of the APA may have the effect of entirely vacating Notice 2016-66 from the IRS' enforcement arsenal. Generally, this nationwide effect potentially arises from Section 706 of the APA, which grants a reviewing court the authority to set aside agency action that, in general, is arbitrary and capricious or otherwise not in accordance with the law.

MarksNelson Observations

During CIC's litigation process, the Supreme Court ruled that the IRS may not claim immunity from an injunction from enforcement of notices requiring disclosure under the Anti-Injunction Act. As a result, the IRS is defending several APA lawsuits on various fronts. We believe the IRS likely chose to forgo an appeal of CIC because a failed appeal would likely create a significant challenge to the IRS' ability to utilize disclosure rules and other regulatory tools in the context of more abusive and opaque transactions.

Additionally, because of the IRS' current backlog on its Priority Guidance Plan, additional regulatory guidance is not likely imminent. In light of the nationwide litigation, reissuance of a notice similar to Notice 2016-66 will most likely come only after a notice and comment period in compliance with the APA.

What This Means For You

If you have participated in a micro-captive transaction or a substantially similar transaction, as defined in Notice 2016-66, you may not be required to file Form 8886.

MarksNelson will not require initial disclosure filings for the 2021 tax year. However, as some participants may have already filed tax returns with the disclosure statement, we will continue to disclose for the 2021 tax year in an effort to minimize potential penalty exposure for all participants. Beginning with the 2022 tax year MarksNelson does not anticipate disclosing participants in a transaction of interest under IRS Notice 2016-66. We will continue to monitor for any additional notices that may require disclosure and provide subsequent updates as needed.


[1] CIC Services, LLC v. IRS, No. 3:17-cv-110 (E.D. Tenn. March 21, 2022)

[2] Mann Construction, Inc. v. United States, No 21-1500, WL 619822 (6th Cir. 2022)

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