shutterstock_650042587_cgstock
Shutterstock
11 March 2021Accounting & tax analysis

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

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."


More on this story

article
27 January 2022   Captives expert returns to law firm.
Law & regulation
18 May 2021   Sean King, the general counsel at CIC Services, has praised the US Supreme Court’s decision to allow a challenge to the Internal Revenue Service’s (IRS) Notice 2016-66, arguing the Anti-Injunction Act would be “tyrannically unconstitutional” if it gave the IRS carte blanche to enforce illegal regulations.
Accounting & tax analysis
16 October 2020   The US Tax Court has ruled in favour of Jesus Oropeza, the shareholder of a microcaptive called FIRM, in a case against the Internal Revenue Service, ruling that penalties imposed by the IRS were made improperly and do not stand.

More on this story

article
27 January 2022   Captives expert returns to law firm.
Law & regulation
18 May 2021   Sean King, the general counsel at CIC Services, has praised the US Supreme Court’s decision to allow a challenge to the Internal Revenue Service’s (IRS) Notice 2016-66, arguing the Anti-Injunction Act would be “tyrannically unconstitutional” if it gave the IRS carte blanche to enforce illegal regulations.
Accounting & tax analysis
16 October 2020   The US Tax Court has ruled in favour of Jesus Oropeza, the shareholder of a microcaptive called FIRM, in a case against the Internal Revenue Service, ruling that penalties imposed by the IRS were made improperly and do not stand.