Internal Revenue Service officials today urged participants in abusive micro-captive insurance arrangements to exit these transactions as soon as possible. The IRS has stepped up examinations of these arrangements and has recently won yet another case in U.S. Tax Court that such arrangements are not eligible for the tax benefits claimed.
On March 10, 2021, the U.S. Tax Court held in Caylor Land & Dev. v. Commissioner, T.C. Memo. 2021-30 (2021), that yet another micro-captive arrangement failed to qualify as insurance for federal tax purposes. This decision follows several earlier Tax Court decisions that also confirmed the IRS’s determinations that certain micro-captive arrangements were not eligible for the claimed federal tax benefits. In Caylor, the Tax Court also sustained the IRS’s determination of accuracy-related penalties and rejected the taxpayer’s claim of reliance on tax advice.
Taxpayers who engaged in abusive micro-captive transactions are once again encouraged to consult an independent tax advisor prior to filing their 2020 tax returns. Taxpayers should consider exiting the transaction and not reporting deductions associated with abusive micro-captive insurance transactions.