A federal court in Tennessee has upheld the IRS's revamped reporting rules on microcaptive insurance, handing the agency a decisive win in its long-running battle with CIC Services over small captive arrangements.
Judge Travis McDonough, of the US District Court for the Eastern District of Tennessee, ruled on March 5 that the IRS's 2025 Final Rule on microcaptive insurance reporting does not violate the Administrative Procedure Act. The court denied CIC Services' motion for summary judgment and granted the government's.
The ruling marks a sharp reversal for CIC Services, the Knoxville-based captive insurance manager that had previously secured two landmark victories against the IRS in the same courthouse.
The dispute traces back to 2016, when the IRS issued Notice 2016-66 designating certain microcaptive insurance transactions as reportable. CIC Services challenged the notice in 2017, arguing the agency had bypassed required public comment procedures.
After lower courts dismissed the case, the US Supreme Court ruled unanimously in May 2021 that the Anti-Injunction Act did not bar CIC Services from bringing its challenge.
On remand in March 2022, Judge McDonough vacated the notice entirely. An analysis by Miller & Chevalier at the time noted the court found the IRS had failed to solicit public commentary and that its record lacked the evidence to support classifying microcaptive arrangements as potentially abusive.
Rather than appeal, the IRS opted to start over, proposing new regulations in April 2023, gathering over 100 public comments, and publishing its Final Rule on January 14, 2025.
The 2025 Final Rule subjects certain microcaptive transactions to disclosure based on three objective criteria.
As outlined by the Treasury Department, a captive electing taxation under Section 831(b) faces scrutiny if an insured or related party owns at least 20% of the entity, if the captive's average loss ratio falls below set thresholds, and if the captive has channeled capital back to related parties as financing.
Transactions meeting all three criteria with a loss ratio below 30% are classified as listed transactions. Those meeting a single factor with a loss ratio below 60% are flagged as transactions of interest.
Tax advisory firm RSM US has noted that taxpayers entering such arrangements in open tax years likely face disclosure obligations.
The same judge who struck down the IRS in 2022 upheld the agency this time, with the difference coming down to process and evidence.
Research published by Current Federal Tax Developments observed that the 2026 administrative record included Tax Court precedent that did not exist when the original notice was issued, citing cases such as Avrahami, Syzygy, and Caylor as providing the evidentiary foundation the IRS had previously lacked.
CIC Services argued the new rule mirrored the defective notice, but the court found the agency had remedied both the procedural and evidentiary shortcomings identified in 2022.
The ruling leaves the Final Rule fully enforceable. CIC Services, which filed its latest suit in April 2025, may appeal.
