The Internal Revenue Service has won another victory in its degradation of microcaptives, as a US tax court has decided that the choice of sick 831 (b) by Syzygy Insurance Co. is invalid and the insurer must acknowledge the premiums it received as income
Prisoners who choose to be taxed under section 831 b of the Internal Revenue Code are taxed only on their investment, not their insurance income, which effectively lowers their tax liabilities compared to other prisoners and commercial insurers . The 831 (b) prisoners are often used by SMEs who are too small to establish conventional prisoners, but many observers say they have also been used by wealthy individuals, their family members, and others to create the appearance of insurance coverage while they are in use. to avoid tax.
Syzygy Insurance Co. was a micro-creative insurance company founded by the family that owned Stoystown, Pennsylvania-based Highland Tank & Manufacturing Co., which manufactures earth and underground steel tanks as determined by Syzygy Insurance Co. v. Commissioner for Internal Revenue was released on Wednesday. It was incorporated into Delaware in December 2008.
Syzygy and Highland Tank participated in a program of Irvine, California-based Alta Holdings LLC, according to the decision. Usually, participants did not buy direct policies from their captured insurers, but from insurance companies affiliated with Alta. From 2008 to December 31
The tax court considered four important issues: whether payments through a microcaptive insurance contract from Highland Tank and its subsidiaries to Syzygy and its front insurance company were deductible as insurance premiums; whether Syzygys § 831 (b) elections were invalid for the years in question; whether the alleged premium payments were otherwise included in Syzygy's income if the court found the arrangement was not insurance and whether the petitioners were responsible for accuracy-related penalties for the years in question.
"We are concerned about Syzygy's business", the tax authority stated in its decision. "The first problem is claims."
During the years in question, Highland Tank did not claim an insurer or Syzygy according to the court's decision. Highland Tank Chairman John W. Jacob testified that there were claims that were eligible for coverage under the deductible compensation principle that was not submitted, and the petitioners did not dispute that claims of around SEK 100,000 were covered.
"The deductible compensation principle was one of HT & A's most expensive insurance policies, and HT & A's failure to file claims after paying the excess is an indication that the arrangement is not insurance in the generally accepted sense," "The petitioners' claim that John W. Jacob was too busy to file claims does not lead us to believe that the arrangement was insurance in the generally accepted sense because HT & A claimed claims for commercial policies such as those not implemented for the captured program policy, "the tax court continued.
The tax court also raised the issue of the prisoners' investment choices, according to judgment. At the end of 2011, life insurance policies that insured Jacob and another family member amounted to more than 50% of Syzygy's assets and were the biggest investments, but Syzygy could not access the money's value or lend against them and could not surrender or cancel or unilaterally terminate the agreements.
"Syzygy's investment choice is also worrying," the tax authorities noted. "We do not believe that an insurance company in the generally accepted sense would invest more than 50% of the assets in an investment that it could not access payment claims."
In determining whether a company is a profitable insurance company, the tax court considered factors as if the policy were arm's length agreements. In 2011, Syzygy decided to leave Alta's prison insurance program after the premiums fell by more than SEK 200,000 that year. Jacob wrote an email to Alta and stated that one of the reasons Highland Tank left the Alta program was the reduction of premiums, which the Court deepened its view that the policy was not arm's length contract.
"It is reasonable to assume that an insurance buyer wants the best coverage for the lowest premiums," the tax authorities noted. "In an arm's length negotiation, an insurance buyer would like to negotiate lower premiums rather than higher premiums. It is obvious that the biggest benefit to paying higher premiums is to increase deductions. Therefore, the fact that John W. Jacob sought higher premiums leads us to believe that the contracts The tax court also rejected the petitioner's argument that the premiums were actuarially determined because the one who set the premiums was not an actuary and his insurance report had no calculations that showed how he reached the premium prices. The premiums were reviewed in connection with the imprisoned solvency, not in relation to whether the premiums were reasonable, which means that the insurance companies' insurance policies did not have actuarially determined premiums, according to the tax authority's decision. These factors indicate that US Risk and Newport Re was not a bona fide insurance company, meaning that they did not issue insurance policies and that Syzygy's reinsurance of these policies did not distribute risk. Syzygy therefore did not achieve sufficient risk distribution for federal income tax through the insurance companies, according to judgment.
"Although Syzygy was organized and regulated as an insurance company, Delaware faced minimum capitalization requirements and paid a claim, These insurance-like properties do not overcome the other failures of the arrangement," the tax authorities say in deciding against microcaptive. "Syzygy is not run as an insurance company. The front runners paid unreasonable premiums and late issuing policies with conflicting and ambiguous terms. "
Family lawyers could not be immediately accessed for comments.