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Letter of Supplemental Authority Filed in Captive Insurance Case

SEP. 27, 2021

Reserve Mechanical Corp. v. Commissioner

DATED SEP. 27, 2021
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Reserve Mechanical Corp. v. Commissioner

[Editor's Note:

Government response.

]

Reserve Mechanical Corp.
v.
Commissioner

September 27, 2021

Christopher M. Wolpert, Esquire
United States Court of Appeals for the Tenth Circuit
Office of the Clerk
Byron White Court House
1823 Stout Street
Denver, CO 80257

Re: Reserve Mechanical Corp. v. Commissioner (10th Cir. — No. 18-9011)
Supplemental Authority Letter Under Rule 28(j)

Dear Mr. Wolpert:

Reserve advises the Court of the unanimous U.S. Supreme Court decision in CIC Servs., LLC v. IRS, 141 S. Ct. 1582 (2021) (copy attached). In this case arising out of the IRS targeting of small captive insurance companies, the Supreme Court held that a suit to enjoin Notice 2016-66, which requires taxpayers to report information about “micro-captive transactions,” does not trigger the Anti-Injunction Act or block suit against the IRS challenging a reporting requirement improperly imposed.

The Supreme Court discussed congressional intent in its Opinion: “The Code provides the parties to such an agreement with tax advantages. The insured party can deduct its premium payments as business expenses. See §162(a). And the insurer can exclude up to $2.2 million of those premiums from its own taxable income, under a tax break for small insurance companies. See §831(b). The result is that the money does not get taxed at all. That much, for better or worse, is a congressional choice.”

Id. at 1587.

On remand, the District Court for the Eastern District of Tennessee issued an order enjoining the IRS' enforcing Notice 2016-66 against CIC (copy attached), stating that CIC is “likely to succeed” on its claim that Notice 2016-66 is an invalid legislative rule.

The courts in the CIC case have understandably expressed concern over the IRS' aggressive campaign against captive insurance arrangements despite the Congressional mandate set forth in two separate Code sections (IRC 501(c)(15) and 831(b)) to encourage small businesses, like Peak Mechanical, to form captive insurers. While these provisions have existed for decades, as the facts in Reserve demonstrate, the IRS' efforts have been to ignore federal legislation expressly authorizing the establishment and operations of captive insurance arrangements.

Notice 2016-66 is a core element of the IRS' aggressive campaign against captives. The Government argues in its brief that small captives have a significant potential for abuse, simply citing to this invalid notice (Gov't Br. 3-5.) for this proposition. As Reserve's briefs demonstrate, the IRS' assumption that all captives are inherently abusive simply cannot withstand scrutiny.

Kindly distribute this letter to the panel assigned to this case.

Sincerely,

Coby M. Hyman
510 Bering, Suite 500
(713) 850-0700
chyman@feldlaw.com

Logan R. Gremillion
510 Bering, Suite 500
(713) 850-0700
lgremillion@feldlaw.com

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