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.

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/

The top three business risks for 2018: Cyber, supply chain and regulatory compliance

The recently released Allianz Risk Barometer ranked the top business risks for 2018, based on the views of more than 1,900 risk management experts globally. Here, we look at the top three identified business risk for Australia and discuss how they can be effectively managed.

https://www.lexology.com/library/detail.aspx?g=46fecdd5-f513-490a-b722-be5250ebafec

Corporate boards address cyber attacks

NEW YORK — How to deal with a potential cyber attack is top of mind for most company directors, but preparing them for this crisis is particularly difficult, says an expert.

http://www.businessinsurance.com/article/20180201/NEWS06/912318899/Corporate-boards-address-cyber-attacks

Insurer not liable for hole-in-one prize

A hole-in-one from 137 yards is not covered when the insurance policy says it must be from at least 170 yards, says a federal appeals court, in denying a nonprofit coverage for two prizes it was obligated to pay in a golf charity event.http://www.businessinsurance.com/article/20171221/NEWS06/912318096/Nonprofit-denied-coverage-for-prizes-in-golf-hole-in-one-event

 

Insurer prevails in grain bin explosion coverage dispute

RSUI Indemnity Co. is not obligated to provide $3 million in property damage caused by a grain bin explosion under an exclusion in its policy, said a federal appeals court in upholding a lower court ruling.http://www.businessinsurance.com/article/20171219/NEWS06/912318030/Insurer-prevails-in-grain-bin-explosion-coverage-dispute?utm_campaign=BI20171219BreakingNewsAlert&utm_medium=email&utm_source=ActiveCampaign

 

As health premiums rise, small businesses seek alternatives

NEW YORK — As small business owners learn what their 2018 health insurance costs will be, some are considering providing different types of coverage for their employees.https://www.usatoday.com/story/money/small-business/2017/12/09/health-premiums-rise-small-businesses-seek-alternatives/931122001/

 

Why You Must Take A Strategic Approach To Risk Management

How many times must we learn the same lesson before we do something different? The world is a scary scary place to do business.https://www.forbes.com/sites/georgebradt/2017/11/08/why-you-must-take-a-strategic-approach-to-risk-management/#6f74d6535791

Survey: Self-funded health plans grow in popularity

As organizations begin to assess options for group health coverage in 2018, new data out this week could help provide some perspective. http://businessrecord.com/Content/Default/All-Latest-News/Article/Survey-Self-funded-health-plans-grow-in-popularity/-3/248/80119

 

Superstorm Sandy offers lessons five years on

Superstorm Sandy marks its fifth anniversary this month, and risk managers warn that businesses must be prepared for the next big storm.http://www.businessinsurance.com/article/20171031/NEWS06/912316897/Superstorm-Sandy-offers-lessons-five-years-on