Latest loss over captives for IRS as it formally ends egg farm case
The IRS has conceded in its case against a Delaware egg farm as part of a captive insurance dispute.
Puglisi Egg Farms used Oxford Risk Management Group to form and manage a captive insurance company to cover risks such as avian influenza, for which commercial insurance was unavailable.
After beginning investigation in 2017, in December 2019 the IRS issued statutory notices of deficiency (SNODS) claiming unpaid tax liabilities for previous years, disallowing deductions for the captive premiums.
“It is determined that the purported insurance and/or reinsurance transactions lack economic substance, that the substance of the transactions do not comport with their form, and that the various steps involved in the transactions were engaged in for no purpose other than to avoid or evade taxes,” it claimed.
The IRS also imposed penalties.
In 2020, the US Tax Court said that the IRS could drop the $2.7m case since it was unlikely to prevail. At the end of October 2021, the court accepted the Internal Revenue Service’s concession of taxes and penalties against the owners of Puglisi Egg Farms concerning the captive insurance arrangement.
Oxford Risk Management, which was not a party to the case, welcomed the result: “Oxford congratulates Puglisi Egg Farms on its victory in the Tax Court, and on a similar result (tax of $1.00) obtained in the companion cases involving Series KF of Oxford Insurance Company LLC,” it said.
“To the best of Oxford’s knowledge, the Puglisi Egg Farms and Series KF cases were the first Oxford-managed captive insurance cases that were scheduled for trial in the Tax Court.”
Sean King, general counsel for CIC Services, which has fought its own battles over captives with the IRS, said: “The IRS conceded everything before the taxpayer could win a ruling against the Service on the merits, so this case establishes no precedent. But regardless, this is a total victory for the taxpayer and a great example for other taxpayers to follow.
“When the IRS tries to extort settlements from entirely legitimate captive insurance companies, those taxpayers with the guts to resist will be rewarded.”
