IRS Attempts to Use its latest Judicial Win to Scare Micro-Captive Participants into Submission

On the heels of its fourth judicial win in Tax Court, today the IRS urged participants in allegedly abusive micro-captive insurance arrangements to exit these transactions as soon as possible.  For many taxpayers, this approach is akin to throwing the baby out with the bathwater, as contrary to the IRS’ belief, not every micro-captive arrangement is abusive.

On March 10, 2021, the U.S. Tax Court held in Caylor Land & Dev. v. Commissioner, T.C. Memo. 2021-30 (2021), that the micro-captive arrangement at issue did not qualify as insurance for federal tax purposes. This decision follows several earlier Tax Court decisions wherein the IRS convinced the Tax Court to rule against the taxpayer and disallow the claimed tax benefits from a micro-captive arrangement.   As an added feather in its cap, the IRS also convinced the Tax Court in Caylor to impose an accuracy-related penalty against the taxpayer. 

IRS Commissioner Rettig was quick to tout this win with the typical fire and brimstone rhetoric :  "In multiple cases before the courts, judges have held that these 'fanciful' and 'unreasonable' arrangements don't add up to insurance in the commonly accepted sense. I strongly urge participants in these arrangements to get independent legal advice separate from those who helped steer them into these abusive arrangements."   In the announcement, IRS Commissioner Rettig also renewed the IRS’ threat to whipsaw taxpayers by disallowing the tax deductions claimed by businesses for premium payments while at the same time requiring domestic micro-captives to include premium payments in income, as well as to impose a 40% strict-liability penalty for undisclosed micro-captive transactions that the IRS determines lack economic substance.  A copy of the IRS announcement may be found HERE. 

These are harsh threats, which the IRS has laced with a sense of urgency.   The reason for such urgency, you ask?  One (reasonable) interpretation is that the IRS is worried – worried that meritorious micro-captive arrangements are working their way through the judicial system and threaten to break the IRS’ winning streak.  This would explain the IRS’ efforts to scare taxpayers out of their micro-captive planning before the IRS is dealt a judicial loss which will bring balance to conversations that the IRS and taxpayers have about the legitimacy of their micro-captive insurance planning.

If you have any questions about micro-captives or any other tax-related topic, please do not hesitate to contact me at (214) 749-2464 or adaddino@meadowscollier.com.