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How Microcaptive 831(b) Arrangements Were Disrupted This Month

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One of the long-awaited captive decisions by the US Tax Court was issued this month.  The microcaptive 831(b) arrangements industry may need to look in the mirror very soon.  This makes four major US Tax Cases that could not have been worse for captives, specifically microcaptives.

Pic ot Tax Sign microcaptive 831(b) arrangements
Public Use License – Wikimedia Commons

Ever since I attended a 2009 CICA Conference in Tucson, AZ, I had thought these arrangements were a way for smaller companies to use captives to insure their risks.  Many of the microcaptives centers were offshore entities such as the Cayman Islands, Bermuda, and St. Kitts amongst many others.

From 2011 until 2017, I had written a business plan for establishing an offshore captive for Workers’ Compensation claims handling.  The IRS placed 831(b)s on its Dirty Dozen List.

I thought I would wait to see if the IRS removed microcaptives from its Dirty Dozen list.  The Service removed it in 2019, but not for the reasons that I was expecting.

The Caylor Case – Captives Go Zero For Four

The case was Caylor Land & Development Inc. v. Commissioner of Internal Revenue.   Many proponents of the captive industry had been waiting on this decision for quite some time.  You can find the full decision here.

The top of the decision’s third page shows two things:

  1. The US Tax Court will rely heavily on the cases already decided (Avrahami, Reserve Mechanical, and Syzygy).
  2. The last sentence below on not breaking new ground did not bode well for Caylor.

[*3] In Avrahami v. Commissioner, 149 T.C. 144 (2017), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

In Reserve Mech. Corp. v. Commissioner, T.C. Memo. 2018-86, 115 T.C.M. (CCH) 1475 (2018), appeal filed, No. 18-9011 (10th Cir. Dec. 20, 2018), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

Then in Syzygy Ins. Co. v. Commissioner, T.C. Memo. 2019-34, 117 T.C.M. (CCH) 1165 (2019), we found that a microcaptive didn’t actually provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would.

We will break no new ground today.

Microcaptive 831(b) Arrangements – Great Article to Read

In Forbes Magazine, one of the most intelligent writers on captives (Jay Adkisson) brought up a very salient point.  You might want to read his whole article.  The analysis is spot-on.

One of the chilling parts of the decision according to Mr. Adkisson was the decision on Caylor could expand outside of the microcaptive 831(b) arrangements:

the opinion in Caylor Land may potentially extend in its application to far more types of captives than where the IRS has so-far limited its own focus, which is to risk-pooled 831(b) captives. Many captives thought to be very safe from a tax perspective may require introspection and reevaluation.. 

Yes, you may want to follow the link to Jay’s article.  It is one of the best articles on microcaptive 831(b) arrangements after the Caylor decision.  Take the time to read it if you have any interest in captives.

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2 Responses

  1. I think the last four tax court decisions are actually good news, for REAL captives. All four of these losers were simply efforts to manage wealth and minimize taxes. None of the four losers were being actually used to manage or finance risk.

    I unwittingly formed my first “microcaptive” in 1994 for a group of six un-related residential care operations. The annual premium was just under $1.2 Million. I learned about 831(b) when I met with the accountant to review the audit. I questioned the federal tax number because we had a sizable profit. He explained that any insurance company with premium under $1.2 Million was only taxed on investment income. Good to know.

    About 10 years later I started noticing all of the 831(b) promoters who were clearing selling tax shelters, not risk management strategies. Over the yeas I wondered when the IRS was going to crack down. I am glad they finally have. My clients’ captives are all risk financing vehicles. Coverages are standard, not exotic. WC, GL, PL, EPLI, Property, etc… The most exotic coverage is Cyber. Premiums are actuarially determined. Claims are filed and claims are paid.

    I say good residence to those who, by thier greed and sloppiness, have tarnished the captive industry.

  2. Dale, your comment is much appreciated. I see that your email extension is from the Cayman Islands. I had consulted for a number of years with a transportation captive in the Caymans. The captive was functioning well. The owner decided to withdraw the captive as he was in his 70’s.

    I did notice, as you pointed out, that each of the microcaptive 831b arrangements had one or more defects that the tax court explained very well. The 831b industry was on the IRS dirty dozen list for almost a decade. Many 831bs paid the tax and folded after receiving the IRS audit letters. I almost started a microcaptive in St. Kitt’s but decided against it after the Sygyzy decision.

    The next year will be interesting for captives. The one thing that Adkisson covered in his Fortune article was the decision reached outside of microcaptives. I assisted quite a number of captives in disbanding in the last three years. Good luck in your captive ventures and please feel free to visit our website and comment anytime.

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James Moore

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Mgmt Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
  • Entrepreneur Magazine
  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
  • Workers Compensation.com
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