AIA Bars Suit Attempting to Invalidate Insurance Transaction Disclosure Requirements

0 Flares 0 Flares ×

Earlier this month in CIC Services v IRS a federal district court in Tennessee dismissed a suit that a manager of captive insurance companies and its tax advisor had brought that sought to invalidate IRS disclosure obligations on advisors and participants in certain micro captive insurance arrangements. The case illustrates the still-long reach of the Anti-Injunction Act, which, despite some recent cracks, serves as a formidable barrier to challenging IRS rules outside traditional deficiency or refund procedures.

I will briefly summarize the case and highlight the court’s rationale in dismissing the suit.


A 2016 Notice indicated that IRS felt that micro captive insurance transactions had the potential for tax avoidance and classified them as transactions of interest. (For background on micro captive insurance companies and the IRS Notice, see a Tax Adviser article here). Failure to comply with the disclosure obligations could lead to hefty civil penalties under Sections 6707(a), 6707A and 6708(a).

CIC, a manager of captives, and an individual who also managed captives and provides tax advice to them, sued in federal district court, claiming in part that the Notice imposed substantial costs and that the IRS in the Notice effectively promulgated legislative rules in APA parlance without complying with mandatory notice and comment requirements. The plaintiffs sought an injunction prohibiting the IRS from enforcing the Notice and a declaratory judgment claiming that the notice was invalid.

The district court held that the Anti-Injunction Act prohibited the suit. The outcome is a fairly straightforward application of the law, though the AIA landscape is somewhat in flux as a result of the Supreme Court’s discussion of the related Tax Injunction Act in the Direct Marketing case from a few years ago. As you may recall, Direct Marketing involved a Colorado law that required out-of-state retailers to provide the state with information reports on their sales to residents of the state. In Direct Marketing, the Supreme Court held that the requirements were not sufficiently connected with the collection or assessment of tax for the challenge to be barred by the Tax Injunction Act, legislation that is similar to though slightly different from the AIA in that it imposes restrictions on cases involving taxes imposed by the states rather than the federal government

The CIC Services case essentially follows the same logic as the majority Florida Bankers case, where the DC Circuit held that the AIA prevented bankers from challenging heightened reporting requirements when the failure to comply would lead to civil tax penalties under Subchapter 68B of the Code (for a criticism of Florida Bankers, see Part 2 of a PT guest post by Pat Smith here).

In this case, Plaintiffs’ claims and their requested injunction necessarily operate as a challenge to both the reporting requirement and the penalty or tax imposed for failure to comply with the reporting requirement. Because the Notice contemplates assessing penalties for non- compliance pursuant to 26 U.S.C. §§ 6707(a), 6707A, and 6708(a), all found within Subchapter 68B of the Internal Revenue Code, Plaintiffs seek, at least in part, to restrain the IRS’s assessment or collection of a tax. Accordingly, the Court lacks subject-matter jurisdiction over Plaintiffs’ claims because they are barred by the AIA and the tax exception to the DJA.

CIC argued in the alternative that they be given the chance to amend the complaint “[i]n the event this Court concludes that the complaint should be dismissed based upon one or more curable pleading defects.” In particular, plaintiffs in their briefing told the court that they had in fact complied with the Notice requirements and would not be subjected to any penalties. The Court held that this did not alter the fact that by seeking an injunction, the suit sought to restrain assessment or collection, even if not directly from plaintiffs.


Challenges to IRS rules such as in the Notice reveal the obstacles that taxpayers and advisors have in challenging rules outside mainstream tax litigation paths. The issue is somewhat more nuanced than perhaps the brief CIC opinion suggests, as there is considerable uncertainty as to whether Direct Marketing should be read as support for narrowing the reach of the terms assessment and collection when considering challenges to IRS rules that may result in penalties, especially in the reporting context. As the Chamber of Commerce district court opinion that allowed the challenge to the anti-inversion regs typified and discussed a few times in PT, including in excellent guest posts by Bryan Camp and Daniel Hemel, there is just enough of an opening to allow creative judges the opportunity to let challenges seemingly within the reach of the AIA as traditionally understood to get through the cracks.

In the months ahead we will see more cases discussing the AIA and how far if at all Direct Marketing should be read to allow earlier challenges to IRS rules that can have far-reaching impact on taxpayers and advisors.



Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind