Another Abusive Captive Takes a Tumble in Tax Court

SRA Founder & CEO, Van Carlson, discusses the Caylor Land Ruling


In a recent ruling, the US Tax Court again concluded that a micro captive wasn’t actually providing insurance. This conclusion isn’t surprising when you consider the facts and as the Judge stated in his summary, “We will break no new ground today.”

What Went Wrong in Caylor Land v. Commissioner?

In the most recent adverse ruling to an abusive micro captive, Caylor Land & Development, Inc., et al. vs. Commissioner, the Court found that Caylor’s captive, Consolidated, Inc, didn’t actually provide insurance and failed to act as an insurer commonly would. Specifically, Caylor’s captive:

  1. Failing to distribute risk by not joining an insurance pool that their captive manager suggested.
  2. Failing to distribute risk by concentrating risk exposure in one entity, one geographic area, and one industry.
  3. Failing to distribute risk in large enough numbers.
  4. Paying claims without adequate supporting documentation.
  5. Issuing claims-made policies after the claims period ended.
  6. Calculating premiums based upon what the insured wanted to pay, rather than having a premium methodology established by a third party.

Consulting Fees Disallowed

What’s also noteworthy about this case is that the Court disallowed the tax deduction for the consulting fees paid between the related parties. While it’s not unusual for related parties to pay each other consulting fees, the Caylor consulting fees were an optical illusion.

No consulting services were constructively provided. The fees were paid so that the related entities could join the captive to give the illusion of risk distribution--evidenced by the consulting fees paid amongst the Caylor entities matching the premium amounts paid to the captive.

Penalties Assessed

It appears that the Court was also making a point by allowing accuracy-related penalties to be assessed. This is the first captive case where the Court awarded penalties.

How to Avoid Being the Next Caylor 

As the Judge states “The line between nondeductible self-insurance and deductible insurance is blurry, and we try to clarify it by looking to four nonexclusive but rarely supplemented criteria.”

  1. Risk Shifting - Proper transfer of risk from your company to the insuring company.
  2. Risk Distribution - Distribution of risk among unrelated parties.
  3. Fortuitous Risk - Insured risk must happen by accident or chance, not ordinary business risk.
  4. Insurance Principles - Must operate in a similar manner as an ordinary for-profit insurance company would.

This criteria outlined by the Judge has been a practice implemented by SRA for years, we call it our 4-Part Test. SRA based this test on previous court cases and would have identified Caylor’s captive as abusive. We find it crucial to follow the 4-Part Test to participate in an 831(b) plan.

Risk Distribution in 2021

If you have a captive and want to know if you’re at risk of non-compliance, a strong litmus test for risk distribution is to ask yourself this question:

“Has my captive participated in claims unrelated to my business?” 

If you’ve been participating in a captive for several years, the answer should be yes, especially after the COVID-19 pandemic.

The pandemic caused hardships and disruptions for nearly every business. Whether it was supply chain interruptions or lost revenue from government-mandated closures, captives insuring these risks saw an unprecedented claim volume in 2020.

But suppose your captive didn’t have any pandemic claims or only had claims your business submitted. In that case, it’s time to have a conversation with SRA about whether your captive will stand up to IRS scrutiny.

Why Putting a Price on Reputational Damage Is So Hard — But Totally Worth It

According to the Reputation Institute — which monitors and ranks the reputation of 7,000 major organizations globally — intangible factors account for 81 percent of a public company’s market value, and improvement or deterioration in a company’s reputation has a tangible impact on performance.

Read the full article here: http://riskandinsurance.com/putting-a-price-on-reputational-damage/

Shares in retail group McColl’s fall 16% on supply chain disruption

Shares in convenience store chain McColl’s fell 16 per cent on Monday to their lowest point in 18 months, after the group reported lower sales following the collapse of one if its suppliers last year.

https://www.ft.com/content/122609ae-8e4c-11e8-bb8f-a6a2f7bca546

 

Cyber and climate risks, human error threaten shipping: Allianz

While large shipping losses have declined 38% over the past decade, a report by Allianz Global Corporate & Specialty S.E. released on Wednesday warned that the industry faces such threats as cyber attacks, climate risks and human error.

Profiles in Risk – E88: The Captive Insurance Market With Van Carlson, CEO of Strategic Risk Alternatives

I’ve been enamored with captive insurance for most of my insurance career. The ability of insureds to get tax benefits for self-insuring exposure solves a lot of problems when they are unable to 1. acquire insurance for their exposure (dangerous product or industry) or 2. are unable to acquire insurance at a reasonable premium (hard market or misunderstood exposure). In this episode, I discuss all things captive with Van Carlson of Strategic Risk Alternatives.

https://insnerds.com/profiles-in-risk-e88-the-captive-insurance-market-with-van-carlson-ceo-of-strategic-risk-alternatives/

Climate change, extreme weather boost supply chain risks

SOUTHAMPTON, Bermuda — Climate risks are directly connected to supply chain risks that should be identified and mitigated as extreme weather events continue to become more severe and intense and cause rising business interruption losses, experts say.

http://www.businessinsurance.com/article/20180613/NEWS06/912321991/Climate-change-extreme-weather-boost-supply-chain-risks

Ormat taking steps to secure Hawaii geothermal plant in light of lava flows nearby

In a release yesterday evening, Ormat Technologies Inc. provided an update on the Puna geothermal power plant located about 15 miles away from the Kilauea volcano, which erupted on May 3, 2018 and which continues to erupt and flow lava.

Ormat taking steps to secure Hawaii geothermal plant in light of lava flows nearby

Fire at Ford suppliers plant disrupts best-selling F-150, temporary layoffs expected

Dive Brief:

https://www.supplychaindive.com/news/ford-meridian-lightweight-technologies-fire-temporary-layoffs/523259/

Atlanta airport takes precautions after a cyberattack on the city

A spokesman says Atlanta's airport has taken down its Wi-Fi network and disabled parts of its website "out of an abundance of caution" following a ransomware cyberattack on the city's computer network.

https://www.cnbc.com/2018/03/23/atlanta-airport-takes-precautions-after-a-cyberattack-on-the-city.html

Expedia subsidiary Orbitz hit in cyber attack

Orbitz, a subsidiary of online travel agency Expedia said on Tuesday that hackers may have accessed personal information from about 880,000 payment cards.

https://www.cio.com.au/article/635020/expedia-subsidiary-orbitz-hit-cyber-attack/