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The IRS wins another microcaptive tax decision



On Wednesday, the IRS won its fourth consecutive case against 831 (b) captive owners when the U.S. Tax Court ruled that a construction company's prisoner did not qualify as insurance for tax purposes.

The long-awaited decision of Caylor Land & Development Inc. v. Commissioner of Internal Revenue is another loss for the once thriving microcapaptic sector, which has been under fire from tax authorities for almost ten years.

The case revolved around a prisoner founded by a family-owned construction company in Tucson, Arizona. The business was founded in 1958 and grew and flourished so that the business by the 1990s had sprouted many subsidiaries and subsidiaries, says court papers. However, much of the revenue from many of the subsidiaries came from “consulting fees” from Caylor Construction, the Group's main business unit.

Caylor purchased comprehensive insurance coverage at an average cost of $ 60,000 per year, but the owners were annoyed that they still incurred average uninsured losses of about $ 50,000 per year, the decision said.

After attending a 2007 catch presentation by Tribeca Strategic Advisors LLC, which was acquired by a unit of Arthur J. Gallagher & Co. In 201

0, the family formed an Anguilla domicile prisoner, Consolidated Inc., which was taxed under Section 831 (b) of the United States Tax Code. So-called 831 (b) prisoners are taxed only on investment income – not insurance income – provided their annual premiums do not exceed the ceiling, which was then $ 1.2 million per year.

Caylor Construction immediately paid $ 1.2 million in prison. for claim coverage for 2007 even though there were only 10 days left in the year. The company continued to pay $ 1.2 million in premiums over the next three years and had few claims paid by the prisoner.

Although the Caylor prisoner, unlike previous microcaptive cases, did not enter into a risk pooling agreement, the court found that there was insufficient risk transfer to constitute insurance.

"During the ten years leading up to Consolidated's formation, the Caylor units had incurred only $ 500,000 in what Caylors called bad debts – about $ 50,000 per year. Although we do not believe that any premium over $ 50,000 per year would be unreasonable, a premium that is so much higher – $ 1150,000 higher to be specific – looks unreasonable and thus likely for something other than “ insurance & # 39; & # 39; as that term is generally understood, ”was stated in the decision.

In addition, the risk-sharing between the various Caylor-related entities did not shift sufficient risk and the premiums paid to the prisoner and deducted by the Caylor entities are not federal tax insurance. The

Caylor decision follows the Avrahami decision in 2017, the Reserve Mechanical decision in 2018 and the Syzygy decision in 2019, all of which went to the IRS. Catalog

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