A federal court on Tuesday granted a preliminary injunction in favor of a captured management company alleging that the IRS exceeded its authority to impose a reporting requirement for micro-chapters without first submitting it for congressional review.
The decision follows a United States Supreme Court ruling in the case, which also went in favor of the captured chief.
In CIC Services LLC v. Internal Revenue Service Knoxville, Tennessee-based CIC Services sued to stop an IRS reporting requirement for microcaptives, often referred to as 831 (b) captives.
The IRS has been investigating microcaptives for several years and has won several cases claiming that the vehicles are used by wealthy families to avoid taxes. As part of its investigations, it introduced in 201
The CIC sued the IRS, saying that claims would cost more than $ 60,000 per year to comply with and could not be imposed without going through a "warning-and-comment" regulatory process. The IRS argued that the lawsuit was banned by federal law, but after a lower court ruling in favor of the IRS, the Supreme Court allowed the lawsuit to continue and it was returned to the U.S. District Court of Tennessee in Knoxville.
In its decision on Tuesday, the district court said that the most important issue in the case was whether the IRS's reporting requirements were a legislative rule, which is subject to review, or an interpretive rule, which it is not.
"The CIC has shown that it is likely to succeed in its claim that Communication 2016-66 is a legislative rule and that it is invalid because the Secretary failed to follow the communication and comment procedures," the Court ruled.
The IRS did not immediately make a call for comment.