US Supreme Court 831(b) Micro-captives – Surprising Unanimous Decision

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US Supreme Court 831(b) – Captive Advisor Win Expands Beyond Workers Comp 

A recent US Supreme Court 831(b) micro-captive decision (unanimous) set a precedent that may go well beyond just Workers Compensation or insurance.  The case was CIC v. IRS.  The link will provide a 23-page PDF file of the decision filed this week.   

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One passage from the US Supreme Court 831(b) decision clarifies what CIC is pursuing:

To begin with, we agree with CIC’s reading of its complaint. The complaint contests the legality of Notice 2016–
66, not of the statutory tax penalty that serves as one way to enforce it. CIC alleges that the Notice is procedurally
and substantively flawed; it brings no legal claim against the separate statutory tax. And CIC’s complaint asks for
injunctive relief from the Notice’s reporting rules, not from any impending or eventual tax obligation.

One distinction, according to Justice Sotomayor is that the results of the case may have been different if the CIC was a taxpayer and not a tax advisor. 

I will keep this article as non-legalese as possible.  This was one of the more difficult articles to write as the subject of the appeal to the Supreme is somewhat complicated. 

831(b) micro-captives have been listed on the IRS Dirty Dozen list for many years.  Yes, certain companies and individuals did abuse what was a great alternative insurance and risk management method. 

The dirty dozen is the IRS’s list of abusive tax schemes.   For some reason, the IRS dropped micro-captives from the list in 2020.  The reason was likely increased enforcement activities.   

The IRS 2016-66 notice can be found here.  The IRS was requiring the 831(b) micro-captive tax advisors to report any transactions that were enumerated in the notice.   Of course, the tax that could or could not have been owed was not the responsibility of the tax advisors. 

The micro-captive industry had lost many lawsuits filed by the IRS over the last few years including this most recent one.

US Supreme Court 831(b) Decision Broad in Scope

The Forbes article that I read had a much broader scope than just Workers’ Comp or insurance.  The title is The Supreme Court Grants Significant Victory for Tax Advisor Rights.  Check out that article here

According to the Forbes article:

The IRS’s enforcement shortcut of issuing a listing notice, instead of following the requirements of the Administrative Procedure Act, may finally come to an end.

How The Captive Industry Viewed the Decision 

Sean King, CIC’s General Counsel fought an uphill battle for the micro-captive industry.  His comment from the Captive Insurance Times article  

 “Almost unbelievably, the IRS’s position was essentially that it alone among federal agencies may, by virtue of the Anti-Injunction Act, issue and enforce even facially illegal regulations without court interference, at least whenever doing so may at some unknown point in the future aid the Service in assessing or collecting some unknown amount of tax from some unidentified taxpayer.”

The case will now go back to the district court for other rulings.  I will update this article as the US Supreme Court 831(b) case evolves to its conclusion.

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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:

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