The eighth opinion by the U.S. Tax Court regarding microcaptive transactions has been issued, and it is the eighth straight loss for taxpayers. Royalty Management Ins. Co. v. CIR, T.C.Memo. 2024-87 (Sept. 16, 2024). Because this opinion is substantially redundant with the previous seven opinions that came before it, I’m not going to describe the underlying facts or reasoning, but rather you can just read it all for yourself here. Note that this is not a final decision and the U.S. Tax Court is still considering whether to assess the 40% penalty which has been so common in these cases.
The only thing that makes this case unique is that the captive was allegedly domiciled in the Delaware Tribal Nation (which is in my native state of Oklahoma and has nothing to do with the state of Delaware), and the insurance company acting as the risk pool was domiciled in the Sac & Fox Nation which is also in Oklahoma. To some degree this made sense because the taxpayer and his business were located in Oklahoma, although apparently the taxpayer was not a native American.
Otherwise, the facts of this cases were largely the same old, same old. The policies and associated paperwork were a mess and not issued timely, the risks being insured by the captive were highly dubious, the policy pricing was made with very little actuarial support, there were insufficient “points of risk” being insured, the risk pool transactions were circular, the few claims were not properly handled, yada, yada, yada.
Most of these cases are so similar that one must wonder at what point does the U.S. Tax Court simply creates a standardized opinion determining that the arrangement was not insurance in any sense, much less in the commonly-accepted sense, and then use automated form fields to add the facts of each case. Alternatively, whether the U.S. Tax Court will start issuing one-line opinions that simply say, “The IRS’s assessment of taxes and penalties is affirmed, see Avrahami v. CIR, etc.” and declare it Miller Time.
The tax law in this area now seems to be so well settled that it is a curiosity that taxpayers with these types of risk-pooled 831(b) microcaptives are so willing to throw good money after bad and fund the very expensive litigation before the U.S. Tax Court case when their odds of success if de minimis, if not flatly zero. The idea that someday somebody is going to win one of these cases is fantastic, in the fantasy usage of that term and not in any way good. It would now take a case with amazingly good facts to win before the U.S. Tax Court, but with the way that these risk pools have been typically structured (large premiums but very few claims) that doesn’t seem likely. There might be cases where taxpayers are able to avoid the penalties based on their reasonable reliance upon an independent tax professional who thought the arrangement was kosher, but those are probably not the cases that the IRS will itself take to the U.S. Tax Court.
Anyway, enjoy reading the opinion here for yourself. It does have its moments where things were done so badly that I literally laughed out loud while reading it. But I’ve similarly laughed, or at least chuckled, with certain parts of each and every of the previous seven opinions as well. If you just want a little flavor of what happened here, it is to be found in the U.S. Tax Court’s conclusion:
” Apart from the labels attached to the entities and documents discussed above, these cases are bereft of evidence pointing to the existence of true ‘insurance.’ The entities in question either did not exist during 2012 or were not organized or regulated as insurance companies. Sheperd Royalty achieved no transfer of risk, and RMIC, the putative reinsurer, accomplished no meaningful distribution of risk. And for six distinct reasons, the arrangements at issue did not remotely resemble insurance in the commonly accepted sense.”
There will doubtless be some practitioners out there who will pooh-pooh this decision and say that “bad facts made bad law”. While this is true, it is also true that bad law is law nonetheless ― and we have now had eight opinions which all basically say the same things.
The law in this area is now as hard as reinformed concrete. Deal with it.