831(b)s dealt fresh blow as US tax court rules Caylor captive not insurance

11-03-2021

831(b)s dealt fresh blow as US tax court rules Caylor captive not insurance

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The 831(b) or micro-captive industry has been dealt a fresh blow this week, with a US tax court ruling yet another micro-captive could not be considered insurance for Federal tax purposes. 

Judge Holmes made the ruling on March 10, 2021, finding that a micro-captive, named Consolidated, owned by Caylor Land and Development and managed by Tribeca, did not qualify as insurance. 

The tax court also bucked a recent trend by affirming 20 percent accuracy-related penalties on Caylor, with the last few similar cases having been resolved without penalties, noted David Slenn, a partner at the law firm Shumaker Loop & Kendrick. 

The court was unimpressed by the argument that the $1.2 million being paid to Consolidated represented annual insurance premiums. With the captive owner having only paid about $500,000 in losses not covered by traditional insurance over a ten year period prior to the captive programme being launched, it found those premiums to be disproportionate. 

Rather than paying $1.2 million in premiums to insure average annual losses of around $50,000 per year, the payments were “likely to be for something other than ‘insurance’ as that term is commonly understood,” the judge said. 

“Unlike the prior three micro-captive Tax Court cases [Avrahami, Syzygy and Reserve Mechanical] Caylor did not involve the use of a risk pool to establish risk distribution, but instead relied upon a ‘brother-sister’ arrangement,” noted Slenn. 

However, on the crucial question of risk distribution, the cases had more in common. 

The ruling said: "As in Avrahami, as in Syzygy, and as in Reserve, we find that the microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would."

Micro-captives, Caylor Land and Development, Tribeca, Consolidated, David Slenn, Shumaker Loop & Kendrick

Captive International