Caylor Land & Dev. v. Commissioner, T.C. Memo 2021-30 (Mar. 10, 2021), the IRS determined that a captive insurance company failed to distribute risk and was not selling insurance in the commonly accepted sense.
In Caylor Land & Dev., the family that owned a construction business satisfied it’s need for insurance with a micro-captive insurer. The individuals’ entities increased their insurance expense by taking out policies from a related microcaptive insurer at a cost of $1.2 million annually and, simultaneously, increased consulting payments between the individuals’ entities grew by about $1.2 million.
The court found that despite the attempts of the captive insurance company to make its transactions look like traditional insurance and take advantage of Code Sec. 831 and captive-insurance caselaw, the premiums paid to the captive insurance company and deducted by the individual entities were not “insurance” for federal tax purposes. In addition, because the entities involved never discussed the payments at issue by getting reasonable advice or by relying on a professional’s reasonable judgment, they were subject to accuracy-related penalties.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.