Ninth micro-captive court case brought by IRS
The IRS has won its latest tax court case brought against a micro-captive owner.
The decision is the ninth consecutive case that the IRS has brought in recent years.
Court filings published on Tuesday in Jones et al vs Commissioner backed the IRS’ original decision to deny claimed federal income tax deductions and exclusions from the owners of California-based Sani-Tech West Inc (STW) for the 2015 and 2016 tax years, and impose accuracy-related penalties.
The executive officers of STW established Clear Sky Insurance Co., Inc. (CSI) as a captive insurance company in 2015 domiciled in Montana.
For the 2015 tax year, STW claimed over $813,000 in deductions for amounts paid to CSI. In addition, CSI excluded earned premiums of $31,000 and $782,000 from its taxable income for tax years 2015 and 2016 respectively under section 831(b).
The tax court found the main issues at play were whether CSI could make a section 831(b) election to exclude the premiums from its income; and whether STW was entitled to deduct those payments.
The court stated both issues turned on whether the CSI captive programme constitutes “insurance” for federal income tax purposes – finding it did not due to 1) CSI failing to achieve risk distribution; and 2) the CSI programme not resembling insurance in the commonly accepted sense.
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