No. 19-930

In the Supreme Court of the United States__________________

CIC SERVICES, LLC, Petitioner,v.

INTERNAL REVENUE SERVICE, ET AL., Respondents.__________________

On Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit

__________________

BRIEF OF THE ALABAMA CAPTIVE INSURANCE ASSOCIATION, INC.,ARIZONA CAPTIVE INSURANCE ASSOCIATION, INC., CAPTIVE INSURANCE

COMPANIES ASSOCIATION, INC., CONNECTICUT CAPTIVE INSURANCE

ASSOCIATION, DELAWARE CAPTIVE INSURANCE ASSOCIATION, INC.,CAPTIVE INSURANCE COUNCIL OF THE DISTRICT OF COLUMBIA, INC.,GEORGIA CAPTIVE INSURANCE ASSOCIATION, INC., HAWAII CAPTIVE

INSURANCE COUNCIL CORPORATION, KENTUCKY CAPTIVE

ASSOCIATION, INC., MISSOURI CAPTIVE INSURANCE ASSOCIATION,MONTANA CAPTIVE INSURANCE ASSOCIATION, INC., NEVADA CAPTIVE

INSURANCE COUNCIL, CAPTIVE INSURANCE GROUP OF NEW JERSEY,NORTH CAROLINA CAPTIVE INSURANCE ASSOCIATION, OKLAHOMA

CAPTIVE INSURANCE ASSOCIATION, PUERTO RICO INTERNATIONAL

INSURERS ASSOCIATION, SELF-INSURANCE INSTITUTE OF AMERICA,INC., SOUTH CAROLINA CAPTIVE INSURANCE ASSOCIATION, INC.,TENNESSEE CAPTIVE INSURANCE ASSOCIATION, INC., TEXAS CAPTIVE

INSURANCE ASSOCIATION, UTAH CAPTIVE INSURANCE ASSOCIATION,U.S. VIRGIN ISLANDS CAPTIVE INSURANCE ASSOCIATION, AND

VERMONT CAPTIVE INSURANCE ASSOCIATION AS AMICI CURIAE IN

SUPPORT OF PETITIONER__________________

WILLIAM YOUNG WEBB

Of CounselWEBB & MORTON, PLLC910 N. Sandhills BoulevardAberdeen, NC 28315(910) 944-9555

K. SCOTT HAMILTON

Counsel of RecordKEVIN M. DOHERTY

TONY D. GREER

DICKINSON WRIGHT PLLC500 Woodward Avenue, Suite 4000Detroit, MI 48226(313) 223-3500KHamilton@dickinson-wright.com

Counsel for Amici Curiae July 22, 2020

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

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TABLE OF CONTENTS

TABLE OF AUTHORITIES. . . . . . . . . . . . . . . . . . . iii

STATEMENT OF INTEREST. . . . . . . . . . . . . . . . . . 1

BACKGROUND ON INSURANCE REGULATIONAND CAPTIVE INSURANCE COMPANIES . . . 5

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . 9

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

I. Impact of Notice 2016-66 on the CaptiveInsurance Industry:. . . . . . . . . . . . . . . . . . . . 10

A. Notice 2016-66 imposes a heavy burdenon the public and causes ongoingirreparable harm to the captive insuranceindustry and its stakeholders . . . . . . . . . 10

B. Notice 2016-66 has a chilling effect on thecaptive insurance industry . . . . . . . . . . . 19

II. The APA should apply to Notice 2016-66, andbecause there was no meaningful opportunityto comment on the proposed rule through thesubmission of written data, views, orarguments, Notice 2016-66 should bedeclared invalid . . . . . . . . . . . . . . . . . . . . . . . 21

A. The APA serves as a conduit for publicinput that permits agencies to craft thewisest rules. . . . . . . . . . . . . . . . . . . . . . . . 21

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B. While recognizing that not all § 831(b)transactions are abusive, Notice 2016-66arbitrarily and capriciously applies toessentially all § 831(b) transactions, eventhough the IRS admits its lack ofinformation regarding the captiveinsurance industry . . . . . . . . . . . . . . . . . . 26

III. Information gathering is a phase of taxadministration procedure that occurs beforethe assessment of a tax, and the AIA shouldnot apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

APPENDIX

Appendix A U.S. Captive Domiciles . . . . . . . . App. 1

Appendix B Letter from the State of UtahInsurance Department to theHonorable John Koskinen datedJanuary 27, 2017 . . . . . . . . . . . . . App. 3

Appendix C Audit Document Request . . . . . . . App. 7

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TABLE OF AUTHORITIES

CASES

Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 302 U.S. App. D.C. 38 (D.C. Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . 23, 25

Avrahami v. Comm’r, 149 T.C. 7 (T.C. Aug. 21, 2017) . . . . . . . . . . . . . 14

CIC Servs., LLC v. IRS, 2017 WL 5015510 (E.D. Tennessee). . . . . . . . . . 30

CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019). . . . . . . . . . 30, 31, 32

CIC Servs., LLC v. IRS, 936 F.3d 501 (6th Cir. 2019). . . . . . . . . . . . . . . . 30

Chrysler Corp. v. Brown, 441 U.S. 281 (1979). . . . . . . . . . . . . . . . . . . . 22, 23

Dep’t of Homeland Sec. v. Regents of the Univ. of Cal., 591 U.S. ___ (2020). . . . . . . . . . . . . . . . . 31

Direct Mktg. Ass’n v. Brohl, 575 U.S. 1 (2015). . . . . . . . . . . . . . . . . . . . . . . 9, 31

Dismas Charities, Inc. v. United States Department of Justice, 401 F.3d 666 (6th Cir.2005) . . . . 23, 26

Enochs v. Williams Packing & Nav. Co., 370 U.S. 1 (1962). . . . . . . . . . . . . . . . . . . . . . . . . 30

Fertilizer Inst. v. United States Envt’l Prot. Agency, 935 F.2d 1303 (D.C. Cir. 1991) . . . . . . . . . . . . . . 24

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First Nat’l Bank v. Sanders, 946 F.2d 1185 (6th Cir. 1991). . . . . . . . . . . . 23, 24

Friedrich v. Sec’y of Health & Human Servs., 894 F.2d 829 (6th Cir. 1990). . . . . . . . . . . . . . . . 22

General Motors Corp. v. Ruckelshaus, 742 F.2d 1561 (D.C. Cir. 1984) . . . . . . . . . . . . . . 22

Gregory v. Helvering, 69 F.2d 809 (2d Cir. 1934) . . . . . . . . . . . . . . . . . 10

Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44 (2011) . . . . . . . . . . . . 9

Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012). . . . . . . . . . . . . . . . . . . . 30, 31

Nat’l Mining Ass’n v. McCarthy, 758 F.3d 243 (D.C. Cir. 2014). . . . . . . . . . . . . . . 23

Ohio Coal Ass’n v. Perez, S.D. Ohio No. 2: l 4-cv-2646, 2016 U.S. Dist. LEXIS 78655 (June 16, 2016) . . . . . . . . . . . . . . 23

Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 135 S. Ct. 1199 (2015) . . . 3, 9, 21, 24

Reserve Mechanical Corp. v. Comm’r, T.C. Memo. 2018-86 (T.C. June 18, 2018) . . . . . 14

Summa Holdings, Inc. v. Comm’r of InternalRevenue, 848 F.3d 779 (6th Cir. 2017) . . . . . . . . 10

Syzygy Insurance Co., Inc., et al. v. Comm’r, T.C. Memo. 2019-34 (April 10, 2019) . . . . . . . . . 14

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United States v. Picciotto, 875 F.2d 345 (D.C. Cir. 1989). . . . . . . . . . . . . . . 24

STATUTES

5 U.S.C. § 551(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5 U.S.C. § 551(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5 U.S.C. § 553 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

5 U.S.C. § 553(b)(A) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(b)(B) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 553(c) . . . . . . . . . . . . . . . . . . . . . 3, 9, 24, 25

5 U.S.C. § 553(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 702 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5 U.S.C. § 706(2)(D) . . . . . . . . . . . . . . . . . . . . . . . . . 21

8 U.S.C. § 1252(b)(9) . . . . . . . . . . . . . . . . . . . . . . . . 31

15 U.S.C. § 1012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

26 U.S.C. § 831(b). . . . . . . . . . . . . . . . . . . . . . . passim

26 U.S.C. § 6111 . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31

26 U.S.C. § 6112 . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31

26 U.S.C. § 6671(a). . . . . . . . . . . . . . . . . . . . . . . . . . 31

26 U.S.C. § 7421(a). . . . . . . . . . . . . . . . . . 9, 29, 30, 31

Consolidated Appropriations Act of 2018, Pub. L. 115–141 . . . . . . . . . . . . . . . . . . . . . . . . . 16

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PATH Act, 129 Stat. 3106-08. . . . . . . . . . . . . . . . . . 16

OTHER AUTHORITIES

C. Anastopoulo, “Taking No Prisoners: CaptiveInsurance as an Alternative to Traditional orCommercial Insurance,” 8 Ohio St. Entrep. Bus.L.J. 209 (2013). . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

“Internal Revenue Service, Abusive tax shelters,trusts, conservation easements make IRS’ 2019‘Dirty Dozen’ list of tax scams to avoid” (March19, 2019), available at www.irs.gov/newsroom/abusive-tax-shelters-trusts-conservation-easements-make-irs-2019-dirty-dozen-list-of-tax-scams-to-avoid. . . . . . . . . . . . . . . . . . . . . . . . 12, 16

IRS, Instructions for Form 8886, at 7, available athttps://www.irs.gov/pub/irs-pdf/i8886.pdf . . 11

IRS takes next step on abusive micro-captivetransactions; nearly 80 percent acceptsettlement, 12 new audit teams established,available at www.irs.gov/newsroom/irs-takes-next-step-on-abusive-micro-captive-transactions-nearly-80-percent-accept-settlement-12-new-audit-teams-established . . . . . . . . . . . . . . . . . . . 12

“IRS unveils ‘Dirty Dozen’ list of tax scams for 2020;Americans urged to be vigilant to these threatsduring the pandemic and its aftermath,”available at https://www.irs.gov/newsroom/irs-unveils-dirty-dozen-list-of-tax-scams-for-2020-americans-urged-to-be-vigilant-to-these-threats-during-the-pandemic-and-its-aftermath . . . . . . 16

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IRS update on “micro-captive insurancet r a n s a c t i o n s , ” a v a i l a b l e a thome.kpmg/us/en/home/insights/2020/01/tnf-irs-update-on-micro-captive-insurance-transactions.html . . . . . . . . . . . . . . . . . . . . . . . . 12

Joint Committee on Taxation, TechnicalExplanation of the Revenue Provisions of theProtecting Americans from Tax Hikes Act of2015, House Amendment #2 to the SenateAmendment to H.R. 2029 (Rules Committee Print114-40), (JCX-144-15), December 17, 2015 . . . . 15

“June 15, 2017 letter from SIIA to TreasurySecre tary Mnuchin , ” ava i lab le a thttp://files.constantcontact.com/9d218c3c001/05dafb54-5f9b-4fba-b08e-512c318af2cb.pdf. . 11, 12

Letter from SIIA to the IRS, dated October 17, 2016,available athttps://www.siia.org/files/0f5af4a0-5c12-4dc5-aa0e-b3cd6d9cfd08.pdf . . . . . . . . . . . . . . . . . . . . 28

Notice 2015-74, available at www.irs.gov/pub/irs-drop/n-15-74.pdf . . . . . . . . . . . . . . . . . . . . . . 28, 29

Notice 2016-66, available athttps://www.irs.gov/pub/irs-drop/n-16-66.pdf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

“Once Scrutinized, an Insurance Product Becomes aCrisis Lifeline,” available athttps://www.nytimes.com/2020/03/20/your-m o n e y / c o r o n a v i r u s - i n s u r a n c e - s m a l l -business.html . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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“Post-COVID-19, Some Businesses May Look toCaptives for BI Solutions, Observers Say,”available at https://media.cicaworld.com/wp-content/uploads/2020/05/Post-COVID-19-Some-Businesses-May-Look-to-Captives-for-BI-Solutions-Observers-Say.pdf . . . . . . . . . . . . 18, 19

“SIIA calls for review of IRS’ ‘activities’ in responseto Executive Order for regulatory relief,”available athttp://www.captiveinsurancetimes.com/captiveinsurancenews/article.php?article_id=6905 . . 17

SIIA Comment Letter to the Acting Secretary of theTreasury and the IRS Commissioner, datedJ a n u a r y 3 0 , 2 0 1 7 , a v a i l a b l e a thttps://www.siia.org/files/News/Notice_2016-66_-_SIIA_Comment_Letter_-_Final_.pdf . . . . . 28

SIIA Letter to Treasury Secretary MnuchinRegarding Executive Order 13789 –Identifying &Reducing Tax Regulatory Burdens, Dated June15, 2020, available athttp://files.constantcontact.com/9d218c3c001/05dafb54-5f9b-4fba-b08e-512c318af2cb.pdf. . 13, 14

“SRS Charts the Total Number of Active Captivesfor 2018,” available at www.captive.com/news/2019/02/25/srs-charts-the-total-number-of-active-captives-for-2018 . . . . . . . . . . . . . . 1, 13, 20

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The above captive insurance associations(collectively, the “Captive Associations”) submit thisbrief as amici curiae in support of the Petitioner, CICServices, LLC.1

STATEMENT OF INTEREST

The aforementioned Captive Associations (the“Amici”) are unaffiliated trade organizationsrepresenting the interests of their respective membersregarding the captive insurance industry. Themembership of the Captive Associations primarilyincludes captive insurance companies and related cells(each being referred to herein as a “captive”) and theirowners, captive insurance managers, attorneys,actuaries, investment managers, certified publicaccountants, banks, financial institutions, and others. Together, these Captive Associations have thousandsof members, including over 3,200 captive insurancecompanies and over 1,800 related cells (for a total ofover 5,000 captives). See “U.S. Domestic CaptiveDomiciles as of Year-End 2018,” attached hereto asAppendix A; and “SRS Charts the Total Number ofActive Captives for 2018,” available atwww.captive.com/news/2019/02/25/srs-charts-the-total-number-of-active-captives-for-2018. All of these

1 Pursuant to Rule 37.6, counsel for the Amici states that nocounsel for a party authored this brief in whole or in part, and noparty or counsel for a party made a monetary contributionintended to fund the preparation or submission of this brief. Noperson other than the Amici, their members, or their counsel madea monetary contribution to its preparation or submission. Counselfor the Amici provided timely notice of the Amici’s intent to filethis brief, and all parties have consented to its filing.

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Captive Associations promote the compliant andsolvent operation of captives through professionaleducation, networking events, and engagement inlegislative and regulatory affairs.

In addition to the state and United States territorybased Captive Associations, two members of the Amici,the Captive Insurance Companies Association, Inc.(“CICA”), and the Self-Insurance Institute of America,Inc. (“SIIA”), are national, not for profit, member-basedtrade associations. Like the other Amici, CICA andSIIA are dedicated to the advancement of the captiveinsurance industry, and their membership includesself-insured entities, third-party administrators,captives, captive owners and managers, excess/stop-loss insurance carriers, and industry service providers(ranging from small professional firms to largecommercial insurers and brokers). These membersdevelop industry best practices, receive anddisseminate education on industry issues, and engagepolicymakers and regulators on a range of subjectsrelevant to the effective functioning of captiveinsurance programs and the nation’s self-insurancesystems, including self-funded health plans, workers’compensation plans, and property and liabilityprograms.

The Amici file this brief to request that the Courtoverturn the decision from the Sixth Circuit Court ofAppeals. At a minimum, the Amici ask the Court toconsider what the Internal Revenue Service (“IRS”) didnot address, namely the detrimental impact of IRSNotice 2016-66 (“Notice 2016-66”) on captives makingthe election under 26 U.S.C. § 831(b) (“§ 831(b)”) and

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the captive insurance industry as a whole. TheAdministrative Procedures Act (“APA”) requires anagency to allow interested persons an opportunity toparticipate in the rulemaking through the submissionof written data, views, or arguments. See 5 U.S.C.§ 553(c). Further, this Court has held that an agencyis obligated to respond to significant comments. SeePerez v. Mortg. Bankers Ass’n, 575 U.S. 92, 135 S. Ct.1199, 1203 (2015). However, the IRS did not allowinterested persons a meaningful opportunity toparticipate in the making of Notice 2016-66, asrequired by the APA. Although Notice 2016-66included a mechanism for the public to comment onhow micro-captive transactions “might be addressed in[future] published guidance,” those comments wererequested on or before the day taxpayers originallywere required to report under Notice 2016-66. Thus,any future published guidance would be of no use totaxpayers required to comply before that deadline. Further, the IRS did not respond to any significantcomments or concerns.

Finally, the Amici contend that Notice 2016-66relates to the reporting of tax-related information, andnot the assessment or collection of a tax. Therefore,the Anti-Injunction Act (“AIA”) should not apply andprohibit the Amici from pursuing the relief set forthherein.

Consequently, the Amici request the Court toconsider the following:

I. Impact of Notice 2016-66 on the CaptiveInsurance Industry:

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A. Notice 2016-66 imposes a heavy burden onthe public and causes ongoing irreparable harm to thecaptive insurance industry and its stakeholders; and

B. Notice 2016-66 has a chilling effect on thecaptive insurance industry.

II. The APA should apply to Notice 2016-66, andbecause there was no meaningful opportunity tocomment on the proposed rule through the submissionof written data, views, or arguments, Notice 2016-66should be declared invalid.

A. The APA serves as a conduit for publicinput that permits agencies to craft the wisest rules;and

B. While recognizing that not all § 831(b)transactions are abusive, Notice 2016-66 arbitrarilyand capriciously applies to essentially all § 831(b)transactions, even though the IRS admits its lack ofinformation regarding the captive insurance industry.

III. Information gathering is a phase of taxadministration procedure that occurs before theassessment of a tax, and the AIA should not apply.

The Amici offer no opinion on any other particularfacts or structure of any insurance program at issue orotherwise, and fully support appropriate efforts by theIRS to curtail those transactions which are actuallyabusive that serve to undermine the industry.

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BACKGROUND ON INSURANCEREGULATION AND CAPTIVE INSURANCE

COMPANIES

Insurance Regulation

State-based insurance regulation has a more than100-year history of success in the United States. Congress, in passing the McCarran-Ferguson Act of1945, exclusively reserved to the States the power toregulate insurance. The States, the District ofColumbia, and several territories each participate inthis national system of state-based regulation.

The McCarran-Ferguson Act states that “No Act ofCongress shall be construed to invalidate, impair, orsupersede any law enacted by any State for the purposeof regulating the business of insurance.” 15 U.S.C.§ 1012. Since its passage, Congress has concluded that“the business of insurance, and every person engagedtherein, shall be subject to the laws of the severalStates which relate to the regulation or taxation ofsuch business.” 15 U.S.C. § 1012. As a result, everyState has comprehensive insurance regulation andoversight capabilities.

At least 35 United States jurisdictions, includingStates, territories, and the District of Columbia permitlicensing and regulation of captives. In each of thesedomiciles, the applicable regulator has the authority togrant an insurance license to a company, afterregulatory review and subject to ongoing oversight. Many States have dedicated professional staff thatexclusively regulate captive insurance.

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Robust Regulatory Standards

All domestic domiciles that regulate captiveinsurance require each applicant for a license tocomplete background checks, maintain certain capitallevels, and provide financial information on demand. The vast majority also require annual review byindependent actuaries, as well as annual audits byindependent CPAs and/or examinations by theregulator, among other requirements.

The standards and requirements that domesticregulators impose on insurance companies, and oncaptives in particular, are intended to protectpolicyholders by ensuring solvency. The standards andrequirements are remarkably consistent across thecountry, and address all aspects of insurance companyoperation, including the subject of the insurance, thecharacteristics of the insurance policies, and thestructure of reinsurance arrangements.

In the various United States captive jurisdictions,the insurance regulators play a very active role inregulating the captive insurance industry. See “Letterfrom Utah Insurance Commissioner Todd E. Kiser tothe IRS Commissioner, dated January 27, 2017”(attached hereto as Appendix B). For example, inorder to gain licensure in any United States captivejurisdiction, every captive must submit an applicationand a feasibility study prepared by a credentialedactuary. Each jurisdiction’s insurance regulator closelyreviews and monitors each captive to determinewhether it is properly funded, has the necessaryliquidity, insures only appropriate risks, and prices itspremiums appropriately.

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Captive Insurance Companies

Captive insurance is a highly regulated andformalized type of risk management that has existedfor over 50 years, allowing companies, or groups ofcompanies, to better manage their own risk. It is acommon risk management tool utilized by a wide rangeof public, private, and not-for-profit entities, includingcolleges and universities, Fortune 500 companies, localbusinesses, hospitals, manufacturers, religious andcommunity organizations, and virtually every othertype of business. Captive insurance covers an equallydiverse and important set of business risk profiles,from property, general liability, product liability,workers’ compensation, and medical stop lossinsurance, to business and supply chain interruptionand many other coverages.

Nearly 5,000 captives are domiciled in andregulated by at least 35 States, demonstrating ahealthy and material industry in the United States. Bydefinition, a captive is a type of insurance companyformed under applicable state law that providesinsurance coverage to its owners and affiliates. Captives can either be owned by one company or bynumerous unrelated entities, similar to a mutualinsurance company. Many of the aforementioned 5,000captives are group captives or protected cell captives,each of which houses the captive insurance programsof any number of unrelated businesses. Indeed, thereare thousands of unique business organizations thatparticipate in captives.

Captives may take many forms. The simpleststructure is a “pure” or single-owner captive created by

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a parent company to provide insurance to itself and itsaffiliates. See C. Anastopoulo, “Taking No Prisoners:Captive Insurance as an Alternative to Traditional orCommercial Insurance,” 8 Ohio St. Entrep. Bus. L.J.209, 213, 221-23 (2013). Even in this “pure” captivearrangement, like third-party insurers, the captivereceives premiums from its parent company inexchange for coverage. The only difference is that theinsured (the parent) controls the insurer (the captive). Id., at 221-25 (outlining the various types of captives).

Captives provide several benefits over third-partycommercial insurers. In addition to more affordablecoverage, a captive can underwrite more customizedpolicies than those available on the open market. Id.,at 216. With actuarial support, captives can tailordeductible and premium amounts, coverage scope, andrisk tolerance because these insurers “address riskpositions for the parent based solely on the parent’sactual risk exposure and history, rather than anindustry-wide calculation.” Id. This is especiallyimportant for industries where ordinary commercialinsurers have a hard time evaluating the relevantrisks. Id., at 213-14, 216.

Captives also offer a more responsive claimsprocess. Id., at 216-17. Submitting claims to acommercial insurer that has “the incentive to denyclaims or delay in paying claims” is time-consuming,adversarial, and litigious. Id., at 217. By contrast, theparent and captive have “the same incentive to pay theclaim from the captive’s reserves.” Id., at 216.

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SUMMARY OF ARGUMENT

First, the Amici ask this Court to consider thewritten data, views and arguments of the Amici thatNotice 2016-66 imposes a heavy burden on the publicand causes ongoing irreparable harm to the captiveinsurance industry and its stakeholders.

Second, the APA requires an agency to allow for ameaningful opportunity for public comment on theproposed rule through the submission of written data,views, or arguments. See 5 U.S.C. § 553(c). Further,this Court has held that an agency is obligated torespond to significant comments. See Perez v. Mortg.Bankers Ass’n, 575 U.S. 92, 135 S. Ct. 1199, 1203(2015). However, the Issuance of Notice 2016-66 by theIRS did not comply with the APA. Such a result isparticularly concerning to the Amici, as this Court hasmade clear that tax rules are subject to the same typesof review as other administrative regulations. See, e.g.,Mayo Found. for Med. Educ. & Research v. UnitedStates, 562 U.S. 44 (2011).

Had the IRS followed the APA, the concerns of theAmici regarding the impact of Notice 2016-66 wouldhave been addressed. Because the IRS failed to followthe APA, the Amici ask this Court to overturn thedecision of the Sixth Circuit.

Third, the AIA prohibits suits brought “for thepurpose of restraining the assessment or collection ofany tax,” 26 U.S.C. § 7421(a), and this Court recentlyexplained that the terms “assessment” and “collection”do not extend to mere reporting requirements. DirectMktg. Ass’n v. Brohl, 575 U.S. 1, 8 (2015). The Amici

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urge this Court to determine that the AIA does notprevent pre-enforcement challenges to tax rules notinvolving the assessment or collection of taxes.

ARGUMENT

I. Impact of Notice 2016-66 on the CaptiveInsurance Industry:

A. Notice 2016-66 imposes a heavy burdenon the public and causes ongoingirreparable harm to the captiveinsurance industry and its stakeholders.

The IRS claims that Notice 2016-66 is necessary toidentify which § 831(b) arrangements should beidentified specifically as tax “avoidance” transactions.2 In reality, however, Notice 2016-66 appears to bedesigned to burden the industry and thereby diminishits size and scope. Notice 2016-66 requires essentiallyall captives making the § 831(b) election, their owners,the insured operating entity(ies) and owners, and anyreinsurer, to submit IRS Form 8886, Reportable

2 It has long been accepted that taking advantage of the tax codeto lower one’s taxes is perfectly acceptable. “Any one may soarrange his affairs that his taxes shall be as low as possible; he isnot bound to choose that pattern which will best pay the Treasury;there is not even a patriotic duty to increase one’s taxes.” Gregoryv. Helvering, 69 F.2d 809, 810 (2d Cir. 1934). Further, the SixthCircuit rejected the IRS’s substance-over-form doctrine torestructure a transaction where the Internal Revenue Codesections at play had the sole purpose of tax avoidance. See SummaHoldings, Inc. v. Commissioner of Internal Revenue, 848 F.3d 779,789 (6th Cir. 2017). The Sixth Circuit also stated that if suchresults were unintended, it was within Congress’ power to correctit. Id., at 789-90.

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Transaction Disclosure Statement. In addition, so-called “material advisors,” like the Petitioner, must fileForm 8918, Material Advisor Disclosure Statement. Although blank copies of Form 8886 are a mere twopages in length, the completed form can be extremelylong and complicated. In fact, by the IRS’ ownestimate, Form 8886 takes more than twenty-onehours, i.e., over half of a standard workweek, tocomplete. See IRS, Instructions for Form 8886, at 7,available at https://www.irs.gov/pub/irs-pdf/i8886.pdf. For some businesses, including many ofthe Amici’s members, this presents a very heavy newpaperwork expansion. If each of the estimated 5,000captive members of the Amici spent 21.5 hourspreparing Form 8886, they would collectively spendover 100,000 hours per year complying with Notice2016-66. And these figures do not include all of themultiple owners, individuals and holding companiesthat must fill out Form 8886. With them included, theamount of time to complete all of the Form 8886’swould double or triple. Additionally, these numbers donot include Form 8918 to be prepared and submitted byadvisors, such as captive managers, CPAs and lawyers,on whom the burden is potentially prohibitive. At theIRS’ estimated rate, an advisor who provides materialadvice to only 52 captives would spend the equivalentof approximately six months each year preparing thepaperwork associated with Notice 2016-66. Forexample, SIIA surveyed hundreds of its captivemembers and found that they had filed over 15,000forms at a collective cost of $22,186,800, to comply withNotice 2016-66. See “June 15, 2017 letter from SIIA toTreasury Secretary Mnuchin,” available at

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http://files.constantcontact.com/9d218c3c001/05dafb54-5f9b-4fba-b08e-512c318af2cb.pdf.

In contrast with this onerous burden, the actualbenefits of Notice 2016-66 to the IRS are likely to beminimal when compared to the amount of informationgathered through the IRS audit process. The Amici areaware of an extensive series of audits that the IRS isconducting and has conducted over the last severalyears.3 There are more than 500 docketed captiveinsurance cases in Tax Court involving § 831(b). See“Abusive tax shelters, trusts, conservation easementsmake IRS’ 2019 ‘Dirty Dozen’ list of tax scams toavoid,” (March 19, 2019), available atwww.irs.gov/newsroom/abusive-tax-shelters-trusts-conservation-easements-make-irs-2019-dirty-dozen-list-of-tax-scams-to-avoid. It is also estimated that thereare, or soon will be, several thousand captive insurancearrangements under audit by the IRS. See IRS updateon “micro-captive insurance transactions,” available athome.kpmg/us/en/home/insights/2020/01/tnf-irs-update-on-micro-captive-insurance-transactions.html.

3 On January 31, 2020, the IRS Commissioner stated that the IRSwill “vigorously pursue those involved in these and other similarabusive transactions going forward. . . Enforcement activity in thisarea is being significantly increased. To that end, the IRS isdeploying additional resources, which includes setting up 12 newexamination teams . . . that will be working to address theseabusive transactions and open additional exams.” See IRS takesnext step on abusive micro-captive transactions; nearly 80 percentaccept settlement, 12 new audit teams established, available atwww.irs.gov/newsroom/irs-takes-next-step-on-abusive-micro-captive-transactions-nearly-80-percent-accept-settlement-12-new-audit-teams-established.

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Further, at the end of 2018, it was estimated that therewere more than 3,200 active captive insurancecompanies and 1,800 cells formed in the United States,and more than 6,600 active captive insurancecompanies and 3,200 cells formed in key jurisdictionsworldwide. See “U.S. Domestic Captive Domiciles as ofYear-End 2018,” attached hereto as Appendix A; and“SRS Charts the Total Number of Active Captives for2018,” available at www.captive.com/news/2019/02/25/srs-charts-the-total-number-of-active-captives-for-2018. This means that there are approximately 5,000active captive risk bearing entities (captives includingcells) formed in United States jurisdictions, andapproximately 10,000 active risk bearing entities, notall of which make the § 831(b) election, formed in keyjurisdictions worldwide as of 2018, the most recent yearfor which data is currently available. Id. Assuming, onthe low end, that the several thousand captivescurrently or soon to be under audit is approximately2,000, the IRS is auditing an estimated number ofcaptive insurance arrangements equivalent to 40% ofthe active captive risk bearing entities formed in theUnited States, or 20% of the active captive risk bearingentities formed in key worldwide jurisdictions. Theseaudits produce information on § 831(b) insurers at apainstaking level of detail. See Appendix C (redactedcopy of an IRS Information Document Request form). Further, it also should be noted that most, if not all, ofthe information that the IRS seeks through compliancewith Notice 2016-66 is already available by virtue ofIRS Form 1120-PC, which each § 831(b) captive andother property & casualty insurance companies arepresently required to file annually. See SIIA Letter toTreasury Secretary Mnuchin Regarding Executive

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Order 13789 –Identifying & Reducing Tax RegulatoryBurdens, Dated June 15, 2020, available athttp://files.constantcontact.com/9d218c3c001/05dafb54-5f9b-4fba-b08e-512c318af2cb.pdf.

The level of information required in these auditrequest forms and 1120-PC Forms produces a far moredetailed and intricate level of information than must beprovided on the Form 8886. These audits ultimatelyled to three decisions in the United States Tax Courtthat decided against the taxpayer.4 Simply put, if theIRS has not learned sufficient information to identifyan abusive transaction from its widespread audits of alarge percentage of the active captives formedworldwide, from the 1120-PC Forms and from TaxCourt litigation, Notice 2016-66 will not make anymaterial difference in its regulatory efforts andamounts to nothing more than an open-ended fishingexpedition.

In light of the extreme burden on the public and theminimal benefit to the IRS, the Amici believe that theactual purpose of Notice 2016-66 is not informationgathering, but rather to deter taxpayers fromparticipating in a lawful and beneficial industry. Tofurther bolster this argument, the Amici would point tothe timing of the Notice 2016-66 release. On December18, 2015, the Protecting Americans from Tax Hikes Act

4 See Avrahami v. Commissioner, 149 T.C. 7 (T.C. Aug. 21, 2017),Reserve Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86(T.C. June 18, 2018), and Syzygy Insurance Co., Inc., et al. v.Commissioner, T.C. Memo. 2019-34 (April 10, 2019). ReserveMechanical Corp. v. Commissioner is currently under appeal to theTenth Circuit Court of Appeals.

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(the “PATH Act”) was enacted.5 The PATH Actincluded revisions to § 831(b) to increase the premiumthreshold to qualify for the § 831(b) deduction from$1,200,000 to $2,200,000, with annual inflationadjustments. The PATH Act also included revisions to§ 831(b) to add two specific ownership diversificationrequirements. These new provisions went into effectfor tax years beginning after December 31, 2016. Inthe wake of this expansion of the § 831(b) premiumthreshold, the IRS response was to issue Notice 2016-66 on November 1, 2016, in an effort to discouragecaptives from taking advantage of the then soon to beeffective newly congressionally authorized expandeddeduction. Indeed, notwithstanding that Congressgave the IRS the authority through the PATH Act toissue guidance to help prevent abuse, the IRS hasfailed to do so more than four (4) years later, despiterepeated good faith requests from the captive industryfor such guidance.

Since taking effect, Notice 2016-66 has inflictedimmediate and irreparable harm on the captiveinsurance industry. Apart from the substantial burdenof compliance discussed above, Notice 2016-66threatens to stigmatize the Amici and their members,and intimidate legitimate businesses and citizens fromengaging in activity that Congress has expresslydeclared lawful, most recently in the PATH Act and the

5 Joint Committee on Taxation, Technical Explanation of theRevenue Provisions of the Protecting Americans from Tax Hikes Actof 2015, House Amendment #2 to the Senate Amendment to H.R.2029 (Rules Committee Print 114-40), (JCX-144-15), December 17,2015 (hereinafter, “PATH Act”).

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Consolidated Appropriations Act of 2018, Pub. L.115–141. See the PATH Act, 129 Stat. 3106-08. TheIRS has long cast aspersions on § 831(b) captives byincluding them on its annual “Dirty Dozen” list ofsupposed “tax scams.” See “Internal Revenue Service,Abusive tax shelters, trusts, conservation easementsmake IRS’ 2019 ‘Dirty Dozen’ list of tax scams to avoid”(March 19, 2019), available at www.irs.gov/newsroom/abusive-tax-shelters-trusts-conservation-easements-make-irs-2019-dirty-dozen-list-of-tax-scams-to-avoid. Presumably, Congress would not have authorized§ 831(b) if it thought that all or most uses of thatsection would amount to a tax scam.6

The IRS has explained that the problem lies with“abusive” uses of § 831(b), under which insureds payinappropriately high premiums or receive insurance forharms that have little or no risk of materializing. Id. Under Notice 2016-66, however, the IRS has declaredthat essentially every captive making the § 831(b)election, including legitimate non-abusive captives, aresubject to the reporting requirement and present “the

6 Approximately two months after the Supreme Court grantedcertiorari to hear this case, on July 16, 2020, the IRS removedmicro-captive insurance transactions from its annual “dirty dozen”list while promising that an upcoming series of press releases willemphasize the illegal schemes and techniques businesses andindividuals use to avoid paying their lawful tax liability, includingsuch scams as abusive micro captives. See “IRS unveils ‘DirtyDozen’ list of tax scams for 2020; Americans urged to be vigilant tothese threats during the pandemic and its aftermath,” available athttps://www.irs.gov/newsroom/irs-unveils-dirty-dozen-list-of-tax-scams-for-2020-americans-urged-to-be-vigilant-to-these-threats-during-the-pandemic-and-its-aftermath.

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potential for tax avoidance or evasion.” Id. In otherwords, Notice 2016-66 casts a cloud of suspicion overevery entity insured by a § 831(b) captive, even whenit is clear that the captive provides appropriateinsurance at actuarially-justified premiums. BecauseNotice 2016-66 implicates legitimate captives, itcontinues to provide a clouded view of what the IRSwould consider to be proper versus improperstructures. Because of this stigma, Notice 2016-66 hasintimidated, and will continue to intimidate, taxpayersto forego lawful activity out of fear of reprisals from theIRS.

To compound the issue, on March 20, 2020, the IRSsent Letter 6336 to at least fifty thousand (50,000)taxpayers, and maybe many more. See “SIIA calls forreview of IRS’ ‘activities’ in response to Executive Orderf o r r e g u l a t o r y r e l i e f , ” a v a i l a b l e a thttp://www.captiveinsurancetimes.com/captiveinsurancenews/article.php?article_id=6905. Letter 6336requires anyone who has taken a deduction or other taxbenefit related to micro-captive insurance on a priortax year return to report to the IRS, under penalty ofperjury, whether the taxpayer is still engaged in amicro-captive insurance transaction, the last year forwhich a deduction was taken and the date participationceased. In this letter, the IRS warned taxpayers thatit is increasing enforcement activity and that it wouldtake into account the taxpayer’s response, or lackthereof, when considering future compliance-relatedactivity related to micro-captive insurance. Further,the information that the IRS sought to obtain from thisLetter 6336 was duplicative and already in its

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possession through the routine filing of 1120-PCForms.

Moreover, this Letter 6336 was issued four (4) daysinto the National COVID-19 Emergency Declaration, ata time when many businesses that own captives wereinaccessible or operating at a diminished capacitybecause of the pandemic crisis. Even worse, the IRSLetter originally required taxpayers to access andreport information about their captive insuranceprograms by May 4, 2020, or face repercussions onfuture compliance related activity for failing to comply. After much pushback to Treasury Secretary Mnuchin,the IRS extended the time to respond to Letter 6336 byone month to June 4, 2020. With stay-at-home andshelter-in-place orders in place for many cities andstates until the end of May or later, many of thesetaxpayers may not have even been able to access theirrecords or professional advisors in order to comply withthe requirement within the short one-month extension,not to mention risking their health and safety becauseof the pandemic.

And perhaps most significantly, captives actuallyhave helped businesses by providing coverage forbusiness interruption claims caused by the pandemic. While virtually all business interruption insurancepolicies written in the traditional insurancemarketplace contain exclusions for COVID or similarviruses, captives have the flexibility of designingcoverages to help businesses respond to this crisis. And indeed, many captives have paid such claims inthe last few months, and numerous claims filings arepredicted. See “Post-COVID-19, Some Businesses May

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Look to Captives for BI Solutions, Observers Say,”available at https://media.cicaworld.com/wp-content/uploads/2020/05/Post-COVID-19-Some-Businesses-May-Look-to-Captives-for-BI-Solutions-Observers-Say.pdf. See also “Once Scrutinized, anInsurance Product Becomes a Crisis Lifeline,” availableat https://www.nytimes.com/2020/03/20/your-money/coronavirus-insurance-small-business.html.

Collectively, the stigma and fear engendered byNotice 2016-66, along with the substantial costs ofcompliance, threaten to stifle the captive insuranceindustry in many states with captive insurance laws. The Amici estimate that a significant percentage of thestand-alone captives licensed by the states andancillary jurisdictions qualify to file under § 831(b). Consequently, if the IRS succeeds in its apparent goalof discouraging the use of § 831(b), a significantpercentage of the captive insurance industry would bethreatened. This would not only be against the interestof the Amici and their members, preventing businessesfrom using captives as a legitimate risk managementtool; it would also be against the intent of Congress,which passed § 831(b) and reaffirmed its use in thePATH Act and the Consolidated Appropriations Act of2018.

B. Notice 2016-66 has a chilling effect onthe captive insurance industry.

It appears that the actions of the IRS have startedto have their intended effect, as reports indicate thatNotice 2016-66 already has begun to affect the captiveinsurance market negatively in the United States. Forexample, in 2018, captives making the § 831(b) tax

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election remained under the microscope, resulting in acontinued reduction in their numbers and a significantdrop in formation activity. See “SRS Charts the TotalNumber of Active Captives for 2018,” available atwww.captive.com/news/2019/02/25/srs-charts-the-total-number-of-active-captives-for-2018. Many of theAmici’s members report that their clients haveabandoned or plan to abandon existing captives and/orforego the creation of new ones since Notice 2016-66took effect. Other members of the Amici have ceasedformation of any captives that utilize § 831(b) becauseof the heightened scrutiny and regulatory burdenimposed by Notice 2016-66. The Amici are also awareof multiple audits of captives or owners, many of whichcan cost in excess of $250,000 to defend, especially iflitigation ensues. In light of these risks and theclouded view of what the IRS would consider to be alegitimate § 831(b) captive, many insuranceprofessionals can no longer recommend the formationof § 831(b) captives in good faith unless their clients arewilling to embrace the substantial costs of complyingwith Notice 2016-66 and the risk associated with anaudit.

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II. The APA should apply to Notice 2016-66,and because there was no meaningfulopportunity to comment on the proposedrule through the submission of writtendata, views, or arguments, Notice 2016-66should be declared invalid.

A. The APA serves as a conduit for publicinput that permits agencies to craft thewisest rules.

The APA provides that “[a] person suffering legalwrong because of agency action, or adversely affectedor aggrieved by agency action within the meaning ofthe relevant statute, is entitled to judicial reviewthereof.” 5 U.S.C. § 702. The APA further empowersthis Court to “hold unlawful and set aside agencyaction, findings, and conclusions found to be ... withoutobservance of procedure required by law.” 5 U.S.C.§ 706(2)(D). Pursuant to the APA, “rules” promulgatedby an agency must be published in accordance withnotice-and-comment procedures. 5 U.S.C. § 553. Anagency’s failure to comply with notice-and-commentprocedures is grounds for invalidating the rule.7

A “rule,” for purposes of the APA, is defined sobroadly as to include virtually any statement an agencymay make. A “rule” is created when an agency makes

7 Neither exception to the APA’s notice-and-comment provisionapplies here. The so-called “interpretive rule” and “good cause”exceptions, authorized by 5 U.S.C. §§ 553(b)(A) and (B), (d)(l) and(d)(3), are “narrow,” to be used only “sparingly.” Perez v. MortgageBankers Ass’n, 135 S. Ct. at 1203. Moreover, the IRS did not claimany exception with respect to Notice 2016-66.

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a statement of “general or particular applicability andfuture effect designed to implement, interpret, orprescribe law or policy or describing the organization,procedure, or practice requirements of an agency.” 5U.S.C. § 551(4). The APA defines “rule making” as the“process for formulating, amending, or repealing arule.” Id., at § 551(5).

Rules that must be promulgated according to theAPA’s notice-and-comment process are called“legislative-type rules.” Chrysler Corp. v. Brown, 441U.S. 281. 302 (1979) (referring to non- interpretativerules as “substantive” or “legislative-type” rules). Forthe purposes of the APA, there is a distinction betweenlegislative rules and interpretive rules. Although thereis no bright line differentiating legislative frominterpretive rules, courts have provided some broadguidance. See Friedrich v. Secretary of Health &Human Servs., 894 F.2d 829, 834 (6th Cir. 1990). “Aninterpretative rule simply states what theadministrative agency thinks the statute means, andonly ‘reminds’ affected parties of existing duties. ... Onthe other hand, if by its action the agency intends tocreate new law, rights or duties, the rule is properlyconsidered to be a legislative rule.” General MotorsCorp. v. Ruckelshaus, 742 F.2d 1561, 1565 (D.C. Cir.1984) (as adopted by the Sixth Circuit in Friedrich, 894F.2d at 834).

Generally, a legislative rule is “one affectingindividual rights and obligations,” whereas an“interpretive rule is a general statement of policy [that]advise[s] the public of the agency’s construction of thestatutes and rules which it administers.” Chrysler

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Corp., 441 U.S. at 302, n. 31 (citing the AttorneyGeneral’s Manual on the APA). “The differencebetween legislative and interpretative rules has to doin part with the authority (law-making versus law-interpreting) under which the rule is promulgated.” Dismas Charities, Inc. v. United States Department ofJustice, 401 F.3d 666, 679 (6th Cir.2005) (citationsomitted). “For purposes of the APA, substantive rulesare rules that create law, while in contrast interpretiverules merely clarify or explain existing law orregulations and go to what the administrative officerthinks the statute or regulation means.” Id. (quotingFirst National Bank v. Sanders, 946 F.2d 1185, 1188-89 (6th Cir. 1991)).

In other words, if the rule has an “actual legaleffect,” it is a legislative rule. Ohio Coal Ass’n v. Perez,S.D. Ohio No. 2: l 4-cv-2646, 2016 U.S. Dist. LEXIS78655, at *53 (June 16, 2016) (quoting Nat’l MiningAss’n v. McCarthy, 758 F.3d 243, 252 (D.C. Cir. 2014)). A rule has legal effect when, “in the absence of therule[,] there would not be an adequate legislative basisfor enforcement action or other agency action to conferbenefits or ensure the performance of duties.” Id. at*54 (quoting Am. Mining Cong. v. Mine Safety &Health Admin., 995 F.2d 1106, 1112, 302 U.S. App.D.C. 38 (D.C. Cir. 1993)).

Interpretive rules are statements as to what anagency thinks a statute or regulation means; it is notbinding on a court, only on an agency. DismasCharities, Inc., at 681. Regardless of the preciselanguage, the basic distinction is this: whereas alegislative rule requires something new of those the

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rule affects, an interpretive rule merely restatesexisting duties, albeit slightly differently or clearerthan originally stated by the statute or regulation. Fertilizer Institute v. United States EnvironmentalProtection Agency, 935 F.2d 1303, 1307-08 (D.C. Cir.1991); United States v. Picciotto, 875 F.2d 345, 347-48(D.C. Cir. 1989) (“rules that merely restate existingduties” are interpretive).

Under the APA, when an agency proposes a newrule that is not merely interpretive in nature, it mustcomply with a four-step notice-and-comment procedure. See Perez v. Mortgage Bankers Ass’n, 135 S. Ct. 1199,1203 (2015).

The APA’s four-step notice-and-comment regimerequires the following:

(a) First, the agency must issue a “general noticeof proposed rulemaking” that shall bepublished in the Federal Register (5 U.S.C.§553(b)) “not less than 30 days before itseffective date.” Id.

(b) Second, “the agency shall give interestedpersons an opportunity to participate in therule-making through submission of writtendata, views or arguments.” Id. at § 553(c).

(c) Third, the agency “must consider andrespond to significant comments receivedduring the period for public comment.” SeePerez, at 1203.

(d) Fourth, when the agency files the final rule,it shall include in the rule’s text “a concise

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general statement of [its] basis and purpose.” 5 U.S.C. § 553(c).

Notice 2016-66 is a legislative rule, not aninterpretive rule. It does much more than restateexisting duties; it creates duties where none existed. Prior to Notice 2016-66, participating in or being amaterial advisor to a micro-captive transaction did nottrigger the duties required of those who engage inreportable transactions. It does not simply “interpret”a statute or regulation. Rather, it imposes substantialnew responsibilities upon taxpayers, under penalthreat. Only because of Notice 2016-66 do reportabletransaction duties fall on those who participate in orare material advisors to § 831(b) captive transactions. Thus, Notice 2016-66 is a legislative rule.

Congress gave the IRS the power to define“reportable transactions,” and only through the properexercise of that power do the duties and potentialpenalties associated with such transactions apply. Thus, it has legal effect; without it, there would be noreportable transactions due to the government and nobasis for enforcement. Stated another way, withoutNotice 2016-66 “there would not be an adequatelegislative basis for enforcement or other agencyaction” against those who participate in or who arematerial advisors to § 831(b) captive transactions. SeeId., American Min. Congress, 995 F.2d at 1112.

Although Notice 2016-66 included a mechanism forthe public to comment on how micro-captivetransactions “might be addressed in [future] publishedguidance,” those comments were requested “on orbefore January 30, 2017.” Thus, any future published

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guidance would be of no use to taxpayers required tocomply before that deadline. Notice 2017-08, issued onDecember 29, 2016, extended the filing date to May 1,2017, but it added nothing further with respect topublic comment. Although a number of tradeassociations and individuals, including several of theAmici, submitted comments to the IRS regardingNotice 2016-66, they were not acknowledged, and suchcomments had no effect whatsoever on the regulatoryparadigm outlined therein. As such, the IRS did notfollow in any way the APA’s public “notice andcomment” provisions before issuing Notice 2016-66,making the publication of Notice 2016-66 botharbitrary and capricious.

As courts have made clear, notice-and-commentrulemaking serves a critical purpose in our politicalsystem: it serves as a conduit for public input in orderfor agencies to craft the wisest rules. DismasCharities, Inc., at 680. That purpose is not servedwhen the agency unilaterally decides what the rule is;instead, when making a rule, the agency should betrying to determine what the wisest rule is. Id.

B. While recognizing that not all § 831(b)transactions are abusive, Notice 2016-66arbitrarily and capriciously applies toessentially all § 831(b) transactions,even though the IRS admits its lack ofinformation regarding the captiveinsurance industry.

In Notice 2016-66, the IRS acknowledged its lack ofinformation regarding § 831(b) captive transactions: “the Treasury Department and the IRS lack sufficient

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information to identify which § 831(b) arrangementsshould be identified specifically as a tax avoidancetransaction and may lack sufficient information todefine the characteristics that distinguish the taxavoidance transactions from other § 831(b) related-party transactions.” Notice 2016-66, Introduction. Hadthe IRS proceeded through the notice-and-commentprocess, it could have gathered much, if not all, of theinformation it lacks. Or it would have been alerted tothe onerous and unnecessary financial costs associatedwith, and reputational damage caused by, makingvirtually all § 831(b) captive dealings reportabletransactions. A proper regulatory decision ought to bebased upon the comments submitted and the actualfacts and information gathered as part of the noticeand comment process, as part of a transparentregulatory system. Instead, the IRS chose to act firstand ask questions later.

Despite the regulation of captives by the UnitedStates captive jurisdictions through numerousinsurance industry experts and professionals, anddespite failing to proceed through the notice-and-comment process, the IRS stated unequivocally that,with regard to captives making the § 831(b) election,“[t]he manner in which the contracts are interpreted,administered, and applied is inconsistent with arm’slength transactions and sound business practices,”thereby effectively subjecting all captives making the§ 831(b) election subject to Notice 2016-66. See Notice2016-66. This type of broad, blanket aspersion aboutcaptives making the § 831(b) election completelysupplants the judgment of numerous insuranceindustry experts and professionals in the United States

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captive jurisdictions when licensing and regulatingcaptives.

Members of the captive industry submittedsubstantial comments on the PATH Act and Notice2016-66, both before and after the issuance of Notice2016-66. See, e.g., Letter from SIIA to the IRS, datedO c t o b e r 1 7 , 2 0 1 6 , a v a i l a b l e a thttps://www.siia.org/files/0f5af4a0-5c12-4dc5-aa0e-b3cd6d9cfd08.pdf, which requested guidance on thePATH Act; and the SIIA Comment Letter to the ActingSecretary of the Treasury and the IRS Commissioner,dated January 30, 2017, available athttps://www.siia.org/files/News/Notice_2016-66_-_SIIA_Comment_Letter_-_Final_.pdf. Even captiveinsurance regulators submitted comments on Notice2016-66. See Appendix B, in which the UtahInsurance Commissioner submitted comments to theIRS regarding the burden of Notice 2016-66 on thecaptive insurance industry. Unfortunately, thesecomments, along with those of many other interestedtaxpayers, did not become a part of any rule-makingprocess; they simply fell upon deaf ears. The IRS failedto respond to any of these comments. Had the IRS gonethrough the notice-and-comment process, the IRSwould have had the opportunity to engage with thecaptive insurance industry to acquire the informationthe IRS admits that they lack.

Interestingly, in issuing Notice 2015-74, the IRSrecognized the value of state regulators. See Notice2015-74, available at www.irs.gov/pub/irs-drop/n-15-74.pdf. In Notice 2015-74, the IRS stated that certainexotic financial arrangements designed to convert

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short-term capital gain and/or ordinary income intolong-term capital gain through contractualmanipulations (“basket contracts”) were “transactionsof interest.” However, Notice 2015-74 excluded basketcontracts that are “subject to regulations by acomparable regulator.” Id. By issuing Notice 2016-66,the IRS essentially disregarded the comments of stateinsurance commissioners and supplanted the role ofthe state Departments of Insurance as regulators of thecaptive industry. Notwithstanding that Notice 2015-74excluded “transactions of interest” that were otherwisesubject to regulation, by issuing Notice 2016-66, theIRS seemingly chose to act in a completely arbitraryand capricious manner by admitting that it did nothave sufficient information to identify which § 831(b)arrangements should be identified specifically as taxavoidance transactions, while ignoring comments fromthe captive insurance industry and state insurancecommissioners and simultaneously targeting allcaptives making the § 831(b) election.

III. Information gathering is a phase of taxadministration procedure that occursbefore the assessment of a tax, and the AIAshould not apply.

The AIA provides that “no suit for the purpose ofrestraining the assessment or collection of any tax shallbe maintained in any court by any person, whether ornot such person is the person against whom such taxwas assessed.” 26 U.S.C. § 7421(a). This statute“protects the Government’s ability to collect aconsistent stream of revenue, by barring litigation toenjoin or otherwise obstruct the collection of taxes.

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Because of the AIA, taxes can ordinarily be challengedonly after they are paid, by suing for a refund.” Nat’lFed. of Indep. Bus. v. Sebelius, 567 U.S. 519, 543(2012), citing Enochs v. Williams Packing & Nav. Co.,370 U.S. 1, 7–8 (1962).

The present challenge to Notice 2016-66 by thePetitioner seeks to restrain the requirement to reportinformation to the IRS before a taxpayer or materialadvisor has become subject to any civil or criminalpenalties simply for failure to comply with Notice 2016-66. The District Court and the Sixth Circuit Court ofAppeals ruled that the Internal Revenue Code treatsthe penalty for not complying with Notice 2016-66 as atax, and that the AIA therefore bars this suit. See CICServices, LLC v. IRS, 2017 WL 5015510 (E.D.Tennessee), CIC Services, LLC v. IRS, 925 F.3d 247(6th Cir. 2019); CIC Services, LLC v. IRS, 936 F.3d 501(6th Cir. 2019).

The Amici believe that the text of the case law onthe pertinent statutes suggests otherwise. The AIAapplies to suits “for the purpose of restraining theassessment or collection of any tax.” 26 U.S.C.§ 7421(a). In the present case, the Plaintiff does notseek to enjoin the enforcement of a tax, but rather toenjoin the IRS from information gathering pursuant tothe requirements of 26 U.S.C. §§ 6111 and 6112 of theInternal Revenue Code. 26 U.S.C. §§ 6111 and 6112cannot rightly be described as either a tax or a penalty,but as statutes requiring the gathering of information.

Congress can describe something as a penalty butdirect that it nonetheless be treated as a tax forpurposes of the AIA. See Sebelius, 567 U.S. at 544. For

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example, 26 U.S.C. § 6671(a) provides that “anyreference in this title to ‘tax’ imposed by this title shallbe deemed also to refer to the penalties and liabilitiesprovided by” subchapter 68B of the Internal RevenueCode. Id. “Penalties in subchapter 68B are thustreated as taxes under Title 26, which includes theAnti-Injunction Act.” See id., at 544-545. However, therequirement to gather information found in 26 U.S.C.§§ 6111 and 6112 is not in subchapter 68B of the Code. Nor does any other provision state that references totaxes in Title 26 shall also be deemed to apply to therequirement to gather information pursuant to 26U.S.C. §§ 6111 and 6112. As the Supreme Courtexplained in Direct Marketing, “information gathering”such as the requirement to provide informationpursuant to Notice 2016-66 is “a phase of taxadministration procedure that occurs beforeassessment … or collection.” See Direct Mktg. 135 S.Ct. at 1129-31 (2015).8

The Amici urge the Court to rule in favor of thePlaintiff on the basis Judge Nalbandian stated in hisdissent in CIC Services, LLC v. IRS, 925 F.3d 247 (6thCir. 2019). “[A] suit to enjoin the enforcement of areporting requirement is not a ‘suit for the purpose ofrestraining the assessment or collection of any tax,’ 26U.S.C. § 7421(a), … because the tax does not result

8 To support this narrow reading of the AIA, the Amici draw ananalogy between this situation and the one presented in Dep’t ofHomeland Sec. v. Regents of the Univ. of Cal., 591 U.S. ___ (2020). In that recent case, the Court narrowly construed 8 U.S.C.§ 1252(b)(9) and (g) to allow review of an agency action under theAPA.

32

from the reporting requirement per se.” CIC Services,LLC v. IRS, 925 F.3d 247, 259-261 (6th Cir. 2019)(Nalbandian, J., dissenting). “The only way for the IRSto assess and collect the tax is for a party to violate the[reporting] requirement. So enjoining the [reporting]requirement only stops the assessment and collectionof the tax in the sense that a party cannot first violatethe [reporting] requirement and then become liable forthe tax.” See id., at 261. To add to this point, theAmici are unaware of any captive or material advisorbeing penalized for failing to comply with Notice 2016-66. As such, there are currently no known penaltiesowing to the IRS that could be enjoined.

CONCLUSION

For the foregoing reasons, the Amici urge the Courtto review closely the validity of the issuance of Notice2016-66. The Amici filing this brief, while offering noopinion on any other particular facts or structure ofany insurance program at issue or otherwise, believethe IRS did not allow a meaningful opportunity tocomment on Notice 2016-66 and failed to respond to thefollowing significant industry concerns:

I. Impact of Notice 2016-66 on the CaptiveInsurance Industry:

A. Notice 2016-66 imposes a heavy burden onthe public and causes ongoing irreparable harm to thecaptive insurance industry and its stakeholders; and

B. Notice 2016-66 has a chilling effect on thecaptive industry.

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II. The APA should apply to Notice 2016-66, andbecause there was no meaningful opportunity tocomment on the proposed rule through the submissionof written data, views, or arguments, Notice 2016-66should be declared invalid:

A. The APA serves as a conduit for publicinput that permits agencies to craft the wisest rules;and

B. While recognizing that not all § 831(b)transactions are abusive, Notice 2016-66 arbitrarilyand capriciously applies to essentially all § 831(b)transactions, even though the IRS admits its lack ofinformation regarding the captive insurance industry.

III. Information gathering is a phase of taxadministration procedure that occurs before theassessment of a tax, and the AIA should not apply.

Respectfully submitted,

WILLIAM YOUNG WEBB Of CounselWEBB & MORTON, PLLC910 N. SandhillsBoulevardAberdeen, NC 28315(910) 944-9555

K. SCOTT HAMILTON Counsel of RecordKEVIN DOHERTYTONY GREERDICKINSON WRIGHT PLLC500 Woodward AvenueSuite 4000Detroit, MI 48226(313) 223-3500KHamilton@dickinson-wright.com

Counsel for Amici Curiae

Dated: July 22, 2020

APPENDIX

i

APPENDIX

TABLE OF CONTENTS

Appendix A U.S. Captive Domiciles . . . . . . . . App. 1

Appendix B Letter from the State of UtahInsurance Department to theHonorable John Koskinen datedJanuary 27, 2017 . . . . . . . . . . . . . App. 3

Appendix C Audit Document Request . . . . . . . App. 7

App. 1

APPENDIX A

See Image Next Page

App. 2

App. 3

APPENDIX B

January 17, 2017

The Honorable John KoskinenCommissionerInternal Revenue Service1500 Pennsylvania Avenue, NWWashington, D.C. 20224

Dear Mr. Koskinen,

I write today regarding IRS Notice 2016-66 (“theNotice”) issued on November 1st of this year. The Noticelabels most captive insurance arrangements that makethe tax § 26 U.S.C. 831(b) election as “transactions ofinterest” and subject to new requirements andpenalties. Because of the increased burden on smallbusiness, statutory ambiguity, absence of regulatoryguidance and negative impacts the Notice has ontaxpayers in Utah, we respectfully request the Noticebe retracted.

App. 4

The captive industry is an important industry for Utah.Utah regulates over 500 captive insurance entities,many of which take the §831(b) election and would besubject to the Notice. The Utah Insurance Departmentfollows the captive regulatory framework standards setout by the National Association of InsuranceCommissioners. Each Utah captive must meet andmaintain State-established capital, surplus, andreserve requirements, and is required to have anannual audit by an approved independent CPA firmand an annual actuarial review by an approvedindependent actuary. Additionally, Utah domiciledcaptive insurers are required to be managed only byapproved management firms, and prides itself onhaving a tough but fair regulatory environment for allbusinesses.

I believe the Notice will negatively affect well-intentioned taxpayers that are trying to follow all ofthe rules. The Notice will have a chilling effect on smallbusinesses that wish to manage their risks through acaptive insurer, just like their larger Fortune 500 sizedcompetitors do. While we understand the IRS’ need toidentify and stop tax avoidance schemes, it is our hopethat the Service can collect this information in a lessburdensome manner or retract this Notice entirely anduse the significant amount of data it has alreadycollected.

In December 2015, I was fortunate to work withSenator Hatch’s Office when Congress changed the§831(b) tax law by increasing the premium thresholdand adding new requirements aimed at restrictingownership options and limiting estate planning. As

App. 5

part of this, Congress specifically requested Treasuryand the IRS write reporting guidance so the captiveinsurance industry will be able to comply with the newrequirements, which took effect January 1, 2017.Nearly a year later, no such guidance was issued.While the captive industry has yet to receive thisguidance, it concerns us even more that the IRS tookthe additional step of issuing the Notice withoutgauging the impact of the recent legislative changes orproviding guidance.

The immediate issue is that thousands of taxpayerswho are owners of small and medium-sized businesswill be subjected to additional financial and regulatoryburdens under the Notice’s required compliance filingswith significant non-compliance penalties.Furthermore, the vast majority of data requested hasalready been reported to the IRS through the normaltax filing process and other Information DocumentRequests (IDRs). Requesting duplicative informationalready in the IRS’s possession through multiplesources, and in such a short timeframe, seemsunreasonable to my constituents, and other taxpayers.

Since the Service needs to update the annual insurancecompany tax return forms anyway to collect theownership information required as part of theDecember 2015 law change, I suggest that the bettersolution is that the Service considers using thisopportunity to request on the updated tax return anyadditional information that it deems necessary toidentify abuse. This approach avoids taxpayers havingto provide the same information twice to the Service,avoids subjecting rule abiding business owners to

App. 6

arduous new requirements, and allows the Service tocollect any information it deems needed to identifyabuse. After the Service reviews the tax returninformation, if further action is warranted, then that isa more appropriate time to issue a narrowly tailoredNotice focused on specific abuses.

On behalf of impacted business owners, I respectfullyrequest retraction of Notice 2016-66.

Thank you in advance for your consideration, pleasecontact Travis Wegkamp, Captive Insurance Director,in my office should you wish to discuss further. He maybe reached directly by phone at 801-537-9294 or emailat twegkamp@utah.gov.

Sincerely,

s/________________________ TODD E. KISER Insurance Commissioner

cc: Sen. Orrin HatchSen. Mike LeeRep. Rob BishopRep. Jason ChaffetzRep. Mia LoveRep. Chris Stewart

App. 7

APPENDIX C

Description of documents requested

Tax Period(s): 201112

*Please be advised that the 2012 tax return has beenpicked up for exam*

Provide the·following documentation for tax years 2011and 2012.

Part I – Instructions and Definitions

Instructions

In responding to this Information Document Request(“IDR”), all requests for documents should be construedexpansively rather than narrowly. All documentsproduced should include all attachments, exhibits,addendums, and appendices.

If XXXXXXXX does not produce a requested document,it should state the efforts made to locate the requesteddocument. In addition, XXXXXXXX must state whether

App. 8

the requested document ever existed, existed but wasdestroyed, or existed but was misplaced.

Please provide all hard copy documents andElectronically Stored Information (ESI) formatted forConcordance/Opticon. All documents originating fromhard copy should be produced as TIFF or JPG namedand branded with the Bates number. All ESI sourceddocuments (e.g. Email, Microsoft Word, Excel,PowerPoint, etc.) should be provided as both Batesbranded TIFF or JPG and in “native” format namedaccording to Bates number. Provide E-mails or otherdocuments with embedded attachments linked in a waythat makes it clear that the documents are related.Documents should be de-duplicated and produced incolor where necessary, with custodian, source and otherinformation included as described in the attachedaddendum. Please remove any password protection orencryption from the individual files, or provide anypasswords, encryption keys or certificates necessary toview the files.

These documents may be produced in read-only form onCD, DVD, or hard drive. To ensure readability of anyrequested document in electronic format, provide thePDF or TIFF files with an image resolution of at least300 dots per inch (dpi). To the extent that anyelectronic indexes or other listings relating to therequested documents are created in preparation forsubmitting them to the Internal Revenue Service,please provide that information with your response toassist in organizing and reviewing the documents.

The attached addendum provides additionalguidelines.

App. 9

Definitions

The following definitions apply to this IDR:

a. For the purpose of this request, the words“documents,” “records” or “data” refer to anymaterials of any kind that are written, printed,typed, reproduced graphically, visually, aurally,electronically, or by any other means, includingbut not limited to:

• Contracts, agreements, plans, papers,summaries, opinions, reports, commentaries,communica t i ons , c o r respondence ,memoranda, minutes, notes, comments,messages, studies, graphs, diagrams,photographs, charts, projections, tabulations,analyses, questionnaires and responses, workpapers, data sheets, statistical orinformational accumulations, computerdatabases, computer disks and formats, dataprocessing cards or worksheets, telexes,telegrams, teletypes, cables, facsimiles,instant messages, voice mail, and similar andrelated documents, data, and materials;

• Video and/or audio tapes, cassettes, films,microfilm, video files, sound files, and allother information stored or processed bymeans of data processing equipment andcapable of being retrieved in electronic,printed, or graphic form;

• Computer stored and generated documentsor data, including but not limited to,electronic mail (commonly referred to as “e-

App. 10

mail”) and attachments, word processingdocuments, and spreadsheets;

• Computer database information (includingmetadata) from document managementprograms or systems that track or controlelectronic documents described above.

b. XXXXXX includes any current or formeremployee, officer, principal, director,shareholder, partner, member, consultant,manager, associate, staff employee, independentcontractor, agent, attorney, or otherrepresentative.

c. XXXXXX Insurance Company, Ltd. includes anycurrent or former employee, officer, principal,director, shareholder, partner, member,consultant, manager, associate, staff employee,independent contractor, agent, attorney, or otherrepresentative.

d. XXXX means XXXXXX Law Offices XXXXXXand XXXXXX includes any current or formeremployee, officer, principal, director,shareholder, partner, member, consultant,manager, associate, staff employee, independentcontractor, agent, attorney, or otherrepresentative.

e. “Fronting Carrier #1” means XXXXXX XXXXXXa company licensed in XXXXXX “FrontingCarrier #1” includes any trust in which XXXXXXXXXXXX is the grantor or beneficiary, and anycurrent or former employee, officer, principal,director, shareholder, partner, member,

App. 11

consultant, manager, associate, staff employee,independent contractor, agent, attorney, or otherrepresentative.

f. “Fronting Carrier #2” refers to XXXXXXXXXXXX a company licensed in the state ofXXXXXX “Fronting Carrier 2” also includes anytrust in which XXXXXX XXXXXX is the settlor,grantor, or beneficiary, and any current orformer employee, officer, principal, director,shareholder, partner, member, consultant,manager, associate, staff employee, independentcontractor, agent, attorney, or otherrepresentative.

g. “Captive Insurance Program” means theprogram pursuant to which (1) Fronting Carrier#1 or Fronting Carrier #2 (“Insurers) issuedterrorism insurance to XXXXXX and otherinsured parties, each of which had one or morerelated captive insurance companies; and(2) insurers ceded all risks of said terrorisminsurance to XXXXXX XXXXXX and captiveinsurance companies related to other insuredparties. The Captive Insurance Program alsoincludes transactions in which XXXXXXXXXXXX issued insurance policies directly toXXXXXX

h. “Captive” means an insurance company orcaptive insurance company to whom risks wereceded by Fronting Carrier #1 or Fronting Carrier#2 under the Captive Insurance Program andwho directly insured a related InsuredParticipant.

App. 12

i. “Insured Participant” means a party thatpurchased one or more terrorism insurancepolicies from Fronting Carrier #1 and/orFronting Carrier #2 under the CaptiveInsurance Program. To the extent that InsuredParticipant has affiliates, subsidiaries,brother/sister companies, or other similarentities that were also parties to InsuredParticipant’s insurance policies described above,such affiliates, subsidiaries, brother/sistercompanies, or other similar entities are alsoincluded in the term “Insured Participant.”“Insured Participant” includes any current orformer employee, officer, principal, director,shareholder, partner, member, consultant,manager, associate, staff employee, independentcontractor, agent, attorney, or otherrepresentative.

j. The term “person” has the meaning as defined insection 7701(a)(1) of the Internal Revenue Codebut also includes all of the person’srepresentatives.

k. The term “related” person or entity includes thepersons specified in sections 267(b), 267(c), 318and 707(b) of the Internal Revenue Code.

l. The term “identify” when used in connectionwith a person means provide the name, title,TIN (as defined in I.R.C. §7701(a)(41)), andcurrent or last known business and residentialaddresses and telephone numbers.

App. 13

m. The term “risk management” means allactivities relating to identifying, calculating,mitigating, reducing, or planning for potentialfinancial, business, or other risk or riskexposure.

n. Part II - Documents/Information to beproduced:

1. Produce all insurance policies and contracts forinsurance that XXXXXX purchased fromXXXXXXXXXX Fronting Carrier #1 and/orFronting Carrier #2 for any insurance period(s).

a. For each such insurance policy or contractspecify the amounts each party insuredunder the policy paid toward the premiumcost.

b. For each such insurance policy or contractproduce documentation of XXXXXXpayments of premiums, including checks orrecords of wire transfers, to XXXXXXXXXXXFronting Carrier #1, and/or Fronting Carrier#2.

2. Produce all insurance binders relating toinsurance that XXXXXX purchased fromXXXXXXXXXXXX Fronting Carrier #1 orFronting Carrier #2 for any insurance period(s).

3. Produce all agreements between or amongXXXXXX, XXXXXXXX, XXXX and/or FrontingCarrier #1 or Fronting Carrier #2.

App. 14

4. Produce all agreements between XXXXXX andXXXX including, but not limited to, engagementletters and contracts.

5. Produce documentation of all paymentsXXXXXX made to XXXX under the agreementsreferenced in the preceding request, includingchecks and records of wire transfers.

6. Describe how XXXXXX first was introduced to orlearned about:

a. XXXX

b. Fronting Carrier #1;

c. Fronting Carrier #2; and

d. the Captive Insurance Program.

7. If XXXXXX first learned about any of the aboveentities or program from one or more persons,identify each such person and provide thefollowing:

a. Describe the nature of XXXXXX relationshipwith such person;

b. Describe the communications XXXXXX hadwith such person regarding XXXXXXXXXXXFronting Carrier #1, Fronting Carrier #2,and/or the Captive Insurance Program;

c. Provide all documents reflecting or related tothe communications referenced in thepreceding request, No. 7. b., above;

App. 15

d. State whether such person receives orreceived compensation from XXXX FrontingCarrier #1, and/or Fronting Carrier #2.

8. Describe all documents that mentionedXXXXXXXXXXXX, Fronting Carrier #1, and/orFronting Carrier #2 that XXXXXX was providedor otherwise obtained before XXXXXX beganbuying insurance from XXXXXXXX FrontingCarrier #1 and/or Fronting Carrier#2, including,but not limited to, program descriptions,circulars, brochures, handouts, advertisements,educational materials, marketing materials,sample contracts, sample policies, data orstatistical compilations, graphs, and/or charts.For each such document:

a. Provide the document;

b. Describe the circumstances under whichXXXXXXXX obtained the document;

c. Identify the person who provided thedocument to XXXXXXXX

d. State when the document was provided toXXXXXXXX

9. Provide each insurance policy, including ridersand any other attachments, which providedinsurance coverage to XXXXXXXX that wasissued by a company other than XXXXXXXXXXFronting Carrier #1 or Fronting Carrier #2 forany insurance period or periods that began on orafter January 1, 2007.

App. 16

10. Provide the name and address of each insurancebroker with whom XXXXXXXX consulted or hadbusiness dealings during the period fromJanuary 1, 2007 through December 31, 2012.

11. Describe XXXXXXXX risk management during2007 and each subsequent year throughDecember 31, 2012.

12. Provide all documents outlining or describingany aspect of XXXXXXXX risk managementduring 2007 and each subsequent year throughDecember 31, 2012.

13. Identify each employee, contractor, and advisorwho contributed to XXXXXXXX riskmanagement during the period from January 1,2007 through December 31, 2012, and for eachsuch individual, describe:

a. The individual’s relationship withXXXXXXXX e.g., employee or contractor;

b. The individual’s role and functions related torisk management for XXXXXXXX

c. The time frame during which the individualfulfilled the specified risk management rolesand functions;

d. The approximate amount of time per monththe individual spent performing the riskmanagement roles and functions;

e. Provide all documents related to or reflectingeach individual’s contributions to XXXXXXX

App. 17

risk management during the above-statedperiod.

14. With regard to each insurance policy or contractreferenced in request No. 1, above, describe alllosses that occurred during the 10 yearspreceding purchase of that policy that wouldhave been covered under the policy if it had beeneffective on the date of loss. For each such loss:

a. State when the loss occurred;

b. Specify the total cost of the loss toXXXXXXXX;

c. Identify any insurance policies that paidclaims filed by XXXXXXXX with respect tosuch loss and state the amounts paid;

d. Specify the amount that the policyXXXXXXXX later purchased under theCaptive Insurance Program would have paidif the policy had been effective as of the dateof loss;

e. Provide all records related to each loss.

15. Identify each individual who participated inXXXXXXXX decision to enter the CaptiveInsurance Program and/or to renewparticipation in each year subsequent to theinitial year.

16. Describe all steps taken by XXXXXXXX todetermine whether to enter the CaptiveInsurance Program and whether to renewparticipation in each year subsequent to the

App. 18

initial year, including, but not limited toresearch, feasibility or other studies, cost-benefitanalyses, cash flow analyses, cost comparisons,meetings, consultation and/or hiring ofactuaries, brokers, and other specialists andexperts, data gathering, and loss projections.

17. Provide all documents reflecting or related to thesteps taken by XXXXXXXX to determinewhether to enter the Captive Insurance Programand whether to renew participation in each yearsubsequent to the initial year.

18. Describe all steps taken by XXXXXXXX todetermine whether to purchase each policy orcontract referenced in request No. 1, above,and/or how much to pay for each policy orcontract, including, but not limited to, research,feasibility or other studies, cost-benefit analyses,cost comparisons, meetings. consultation and/orhiring of actuaries, brokers, and other specialistsand experts, data gathering, and lossprojections.

19. Provide all documents reflecting or related to thesteps taken by XXXXXXXX to determinewhether to purchase each policy or contractreferenced in request No. 1, above, and/or howmuch to pay for each policy or contract.

20. Provide all documents reflecting communicationsbetween or among XXXXXXXX employees,owners, principals, contractors, and/or advisorsregarding whether to enter the CaptiveInsurance Program, whether to renew

App. 19

participation each year, and/or whether topurchase each insurance policy or contractreferenced in request No. 1, above.

21. Describe all oral communications betweenXXXXXXXX and XXXX Fronting Carrier #1and/or Fronting Carrier #2 that precededXXXXXXXX entering the Captive InsuranceProgram, including:

a. When the communications occurred;

b. the parties to the communications; and

c. The general subject matter of thecommunications.

22. Produce all documents related to or reflectingthe communications referenced in the precedingrequest, including, but not limited to,memoranda and notes of meetings or telephonecalls.

23. Describe all oral communication betweenXXXXXXXX and XXXX Fronting Carrier #1and/or Fronting Carrier #2 that precededXXXXXXXX renewing participation in theCaptive Insurance Program in each yearsubsequent to the initial year, including:

a. When the communications occurred;

b. the parties to the communications; and

c. the general subject matter of thecommunications.

App. 20

24. Produce all documents related to or reflectingthe communications referenced in the precedingrequest, including, but not limited to,memoranda and notes of meetings or telephonecalls.

25. Produce all documents exchanged amongXXXXXX and XXXXXXXXXXXXX FrontingCarrier #1 and/or Fronting Carrier#2 precedingXXXXXXXX entering the Captive InsuranceProgram or renewing participation in theprogram in each subsequent year. Suchdocuments include, but are not limited to:

a. Correspondence and e-mails;

b. records;

c. computations;

d. spreadsheets;

e. forms;

f. illustrations; and

g. draft or sample policies or contracts.

26. Provide all applications for insurance XXXXXXsubmitted to Fronting Carrier #1, FrontingCarrier #2, and/or XXXXXXXXXXXX for anyinsurance period.

27. Describe all oral communications betweenXXXXXX and XXXX Fronting Carrier #1,Fronting Carrier #2, and/or XXXXXXXXXXXXthat preceded the issuance of each insurancepolicy referenced in request 1, above, including:

App. 21

a. When the communications occurred;

b. the parties to the communications; and

c. the general subject matter of thecommunications.

28. Produce all documents related to or reflectingthe communications referenced in the precedingrequest, including, but not limited to,memoranda and notes of meetings or telephonecalls.

29. Produce all documents exchanged amongXXXXXX and XXXX Fronting Carrier #1,Fronting Carrier #2 and/or XXXXXXXXXXXXpreceding the issuance of each insurance policyor contract referenced in request No. 1, above.Such documents include, but are not limited to:

a. Correspondence;

b. records;

c. verification of loss history;

d. forms;

e. illustrations; and

f. draft or sample policies or contracts.

30. Identify each person who played a role innegotiating, reviewing, and/or evaluatingXXXXXXXX insurance policies and/or contractsreferenced in request No. 1, above, and for eachperson:

App. 22

a. State the person’s relationship withXXXXXXXX such as employee or contractor;

b. Describe the person’s credentials andexperience pertinent to insurance,reinsurance, underwriting, and law;

c. Describe specifically the person’s role withrespect to negotiating, reviewing, and/orevaluating XXXXXXXX insurance policies;

d. State the time frame in which the personprovided assistance with respect tonegotiating, reviewing, and/or evaluatingXXXXXXXX insurance policies;

e. Provide all documents related to the person’snegotiating, reviewing, and/or evaluatingXXXXXXXX insurance policies.

31. State when each of the policies or contractsreferenced in request No. 1, above, was issuedand provided to XXXXXXXX

a. Provide all documents related to the issuanceand providing of the policies or contractsreferenced in request No. 1, above, toXXXXXXXX including, but not limited to,cover letters, correspondence, and emails.

32. Describe all costs paid by XXXXXXXX inconjunction with formation and/oradministration of XXXXXXXXXXXX

33. Provide documentation, including checks andrecords of wire transfers, of all paymentsreferenced in the preceding request.

App. 23

34. Provide all documents related to formation ofXXXXXXXXXXXX including, but not limited to,correspondence, memoranda, meeting notes,proposals, and applications.

35. Provide all claims, claim forms, and supportingdocumentation XXXXXX submitted under theinsurance policies or contracts referenced inrequest No. 1, above.

36. Provide all documents reflecting or related topayments by Fronting Carrier #1, FrontingCarrier #2, and/or XXXXXXXXXXXX toXXXXXX for each claim filed under theinsurance policies or contracts referenced inrequest No. 1, above.

37. Describe the Captive Insurance Program’s claimadjustment processes.

38. Provide all documents reflecting or related to theclaims adjustment process for each claimXXXXXXXX submitted under the insurancepolicies or contracts referenced in request No. 1,above, including, but not limited to,correspondence, documents exchanged duringthe claims adjustment process; notes andmemoranda; analyses; settlement documents;and documents describing or outlining claimsadjustment procedures.

39. Identify all individuals who participated onbehalf of XXXXXX, XXXX Fronting Carrier #1,Fronting Carrier #2, and/or XXXXXXXXXXXX inthe claims adjustment procedures under theCaptive Insurance Program.

App. 24

40. For the period from January 1, 2007 through thepresent, identify all of XXXXXX current andformer owners and state the percentageownership of each.

41. For the period from January 1, 2007 through thepresent, identify all of XXXXXX current andformer officers, directors, and principals.

42. Provide all tax opinions or other documents onwhich XXXXXX relied in claiming deductions forpremium payments under the Captive InsuranceProgram on its federal income tax returns forthe taxable years 2011 and 2012.

43. Identify all persons upon whose advice orstatements XXXXXX relied in claimingdeductions for premium payments under theCaptive Insurance Program on its federalincome tax returns for the taxable years 2011and 2012.

a. Describe the advice or statements renderedby each such person;

b. Specify the date(s) on which the advice orstatements were rendered;

c. Identify the individual(s) to whom the adviceor statements were rendered;

d. Provide all documents related to or reflectingeach such person’s advice or statements.

44. Provide copies of all prior and subsequent yearFederal Income Tax returns filed by XXXXXXXX

App. 25

for which it participated in the CaptiveInsurance Program.

45. For taxable years ended 2011 and 2012 providethe following:

a. Provide complete copy of financialstatements (either audited or compiled),including all footnote disclosures.

b. Provide the following accountant’s workpapers, including but not limited to:

i. Chart of accounts and groupings

ii. Adjusting and closing entries

iii. Year-end working trial balance

iv. Year-end tax return work papers andreconciliation schedules including allSchedule M adjustments (including all ofthe working papers for theseadjustments).

c. Provide the general ledger and/or detailedtrial balance. The general ledger details mustbe complete and show ALL of the activity ineach account.

d. Provide an organizational chart. Pleaseinclude all foreign and domestic subsidiaries,if applicable.

e. Provide corporate minutes.

f. Provide a description of XXXXXX activities.

App. 26

46. Provide XXXXXX business plan and otherdocuments related to its goals, objectives, andbusiness strategies.