CIC Services’ Request For Attorneys’ Fees Disapproved by Judge

A micro-captive insurance adviser shouldn’t be awarded attorneys’ fees in its case against the IRS because the agency’s losing position was substantially justified, according to a magistrate judge’s report and recommendation.

CIC Services LLC asked for the fees in the long-running case that has included a US Supreme Court decision that greenlighted the firm’s suit and a ruling from the district court that the firm didn’t have to comply with an Internal Revenue Service reporting requirement.

In siding with the IRS over the fees, Magistrate Judge Jill E. McCook noted the agency hadn’t defied any binding court precedent when it maintained that the requirement didn’t have to go through a notice-and-comment process under the Administrative Procedure Act.

“The IRS therefore did not take a position that was ‘flatly at odds with the controlling case law’ but instead it ‘lost because an unsettled question was resolved unfavorably,’” McCook wrote in the Wednesday report.

In its fees request, the firm pointed to the Equal Access to Justice Act, which provides parties who beat the US in a civil case with attorneys’ fees unless the government’s position was substantially justified or special circumstances make an award unjust.

In determining whether the government’s position is “substantially justified,” a court must determine if the position is justified to a degree that could satisfy a reasonable person by looking at the merits and position as a whole, McCook said.

“After reviewing this case holistically, the undersigned concludes that the IRS has shown that its position in this litigation was substantially justified,” according to the recommendation. “Hence, it is recommended that no fees be awarded” to CIC Services.

The IRS said CIC Services agreed that the agency’s position that the suit was blocked by the Anti-Injunction Act was substantially justified, even though the Supreme Court sided with the firm in 2021. And it defended its justification for arguing that its reporting requirement didn’t need to be issued by first giving notice and responding to public comments, even though it lost on that point at the district court in 2022.

The firm brought the case to challenge IRS Notice 2016-66, which required micro-captive insurance advisers to report on the transactions. The transactions involve small insurance companies that may be eligible for tax breaks depending on their premium income. The IRS believes some transactions may be vehicles for tax avoidance.

The ultimate decision on awarding attorneys’ fees rests in the hands of Chief Judge Travis R. McDonough at the US District Court for the Eastern District of Tennessee.

Attorneys at Lazarus & Associates, the Adam Webber Law Group, and Gentry, Tipton & McLemore PC, which represented the firm, didn’t immediately respond to a request for comment. The Justice Department, which represented the IRS, also didn’t immediately respond to a request for comment.

The case is CIC Services, LLC v. IRS, E.D. Tenn., No. 3:17-cv-110, report and recommendation 7/12/23.