The Tax Court has ruled in favor of the IRS In Keating v. Commissioner (T.C. Memo. 2024-2) that a microcaptive arrangement was not “insurance in the commonly accepted sense” under Section 831(b). Section 831(b) permits qualifying insurance company taxpayers to elect to exclude premiums received from gross income, meaning a captive insurance arrangement between related parties provides a permanent benefit. However, the IRS has identified such arrangements as potentially abusive, possibly rising to be transactions of interest or a listed transaction.
This case follows several others that involved particularly bad facts for the taxpayer, including the following practices of the taxpayer:
- Determining premiums and making adjustments after a loss event
- Inadequate or absent books and records
- Determining premiums where it appeared the determinant sought to get as close as possible to the Section 831(b) limit (as opposed to premiums based upon risk exposure)
- Documentation that stated the arrangement allowed for a tax savings account that could enable circular cash flow
Thus, the IRS argued that this was not “insurance in the commonly accepted sense.” While the court ruled in the agency’s favor, it did not address the other common law factors regarding whether an arrangement is insurance or not. Those factors are risk shifting, risk distribution, and having an insurable risk.
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