Some legal battles don't end with a single ruling — they simply pause, regroup and return for another round. That's exactly the situation now playing out at the Sixth Circuit, where the Internal Revenue Service is fighting to preserve a revised set of rules requiring taxpayers to disclose certain microcaptive insurance arrangements, arguing the regulations comply fully with the Administrative Procedure Act.

The Government's Case on Appeal

In a brief filed Friday, the IRS urged the appeals court to uphold U.S. District Judge Travis R. McDonough's March decision, which found the rules pass muster under the APA. According to the agency, Congress specifically authorized the Treasury Department to designate certain microcaptive insurance arrangements carrying potential for tax avoidance or evasion as "reportable transactions" — a category that includes a narrower subset known as "transactions of interest." Treasury also holds separate authority to flag arrangements it has specifically identified as tax-avoidance schemes, labeling them "listed transactions."

Treasury's Authority Under the Microscope

"Treasury exercised that authority when it promulgated" the disputed regulations, the IRS wrote, referring to rules that designate certain microcaptive arrangements as both "transactions of interest" and "listed transactions." The agency explained that taxpayers participating in these arrangements must disclose their involvement, giving the IRS the information it needs to determine whether to examine the transactions and potentially disallow any claimed tax benefits.

CIC Services Pushes Back — Again

On the other side of this legal tug-of-war sits CIC Services LLC, a microcaptive insurance advisory firm that filed its own appellate brief back in June. CIC argued that the final rules, issued in January 2025, violate the APA for essentially the same reasons a 2016 IRS notice was previously struck down. The firm's core argument: the IRS "cannot show that most small captives are abusive or potentially abusive, or that it needs more information to determine whether they are" — a challenge to the very foundation of the reporting requirements.

The IRS Responds to Its Critics

In Friday's brief, the IRS addressed CIC's argument head-on: "Although CIC has acknowledged that captive insurance arrangements can 'most definitely' be used for tax avoidance or evasion, it argues that the particular reporting requirements established by Treasury were arbitrary, capricious, and/or in excess of authority. The district court correctly rejected these arguments and upheld the regulations."

What the Lower Court Already Decided

Back in March, Judge McDonough found that the revamped rules — which require taxpayers to disclose specific microcaptive insurance arrangements to the IRS — don't run afoul of the APA, pointing to multiple U.S. Tax Court decisions demonstrating these arrangements can indeed be used to dodge taxes. In that ruling, the judge rejected CIC Services' challenge, which had argued the agency exceeded its authority and acted in an arbitrary and capricious manner.

A Tale of Two Rulings From the Same Judge

What makes this case particularly compelling is the history between these two parties. Judge McDonough drew a clear distinction between this case and an earlier APA challenge CIC Services brought back in 2017 — one where the company successfully convinced him that the original microcaptive reporting rules failed to meet APA standards.

What Changed the Second Time Around

In that earlier 2017 case, the judge had struck down Notice 2016-66, which flagged certain microcaptive arrangements as potentially abusive, ruling the IRS failed to adequately justify its decision and skipped necessary public feedback steps. This time, though, the calculus shifted. According to Judge McDonough, the IRS demonstrated it had actually considered multiple Tax Court findings showing taxpayers had abused tax incentives designed to support these in-house insurance arrangements — the missing justification that had doomed the agency's earlier attempt.

Where the Case Stands Now

Notably, that earlier 2022 memorandum opinion had set aside the IRS notice entirely, finding the agency had failed to justify flagging the transactions as potentially abusive while also shirking its obligation to gather public feedback — a defeat that sent the IRS back to the drawing board to craft the very rules now under fresh scrutiny at the Sixth Circuit.

A representative for the IRS declined to comment Monday. Representatives for CIC Services and the U.S. Department of Justice didn't immediately respond to requests for comment.

The Legal Teams Involved

CIC Services is represented by Cameron T. Norris and Ryan M. Proctor of Consovoy McCarthy PLLC, along with Adam R. Webber of Webber Law Group and Kenneth A. Lazarus of Lazarus & Associates.

The IRS is represented by Geoffrey J. Klimas, Francesca Ugolini and Ellen P. DelSole of the U.S. Department of Justice's Civil Division, Tax Litigation Branch.

With round one having gone to CIC Services and round two currently favoring the IRS, this rematch at the Sixth Circuit could ultimately decide whether the agency's revised playbook for policing microcaptive insurance finally holds up — or whether it's back to the drawing board once again.