U.S. Tax Court Rules Against Microcaptive Transactions in Keating v. CIR Opinion

The U.S. Tax Court has recently issued its fifth opinion regarding microcaptive transactions, ruling in favor of the IRS in the case of Keating v. CIR. This opinion, like the previous ones, highlights the misuse of captives as tax shelters disguised as insurance companies. The case involved Risk Management Strategies Inc. (RMS) and its owners, who engaged in a complex scheme involving captives in Anguilla.

The arrangement involved setting up a captive insurance company, Risk Retention, to provide insurance coverage to RMS. However, the U.S. Tax Court found that the premiums paid by RMS to Risk Retention were not deductible as insurance expenses. The court also determined that the arrangement did not meet the criteria for insurance in the commonly accepted sense, as key insurance functions were not properly carried out.

The court criticized the lack of arm’s length negotiations between the parties, the inflated premiums, and the poor claims administration. The entire setup was deemed a sham, with the focus being on maximizing tax deductions rather than providing legitimate insurance coverage.

The owners of RMS, Keating, Candland, and Doss, were found liable for back taxes and penalties due to the invalidity of the arrangement. The court also highlighted the failure of their tax counsel to provide proper advice and the lack of effort to understand the tax implications of the scheme.

Overall, the Keating v. CIR case serves as another warning to businesses engaging in microcaptive transactions. The court’s decision underscores the importance of conducting legitimate insurance transactions and adhering to tax laws to avoid penalties and legal consequences.