Micro captives have taken another knock back in the latest US tax court ruling involving Caylor Land & Development and the Internal Revenue Service (IRS). In the court case on 10 March, Judge Holmes found that the micro captive involved did not provide insurance because it failed to distribute risk and didn’t act as an insurer commonly would. In September 2007, Rob Caylor established the micro captive, which was named Consolidated and was managed by Tribeca. Consolidated was incorporated under the laws of Anguilla and licensed as an Anguilla insurance company. On 21 December 2007, Consolidated elected under section 953(d) 8 to be treated as a domestic US corporation for tax purposes, as well as an election under section 831(b)(2)(A) to be taxed solely on investment income so long as its annual premiums did not exceed $1.2 million, which is what made Consolidated a micro captive. Quoting Avrahami, Reserve Mechanical, and Syzygy, Judge Holmes states that “we will break no new ground today” in Caylor v Commissioner. The court's opinion was made using the same structure as the three previous micro captives cases; Avrahami, Reserve Mechanical, and Syzygy. In Avrahami v. Commissioner, which was the first micro captive to face the US Tax Court, Judge Mark Holmes ruled on 21 August 2017 that payments made to the Avrahamis by their micro captive, Feedback, amounted to taxable dividends outside of the scope of certain tax elections. The court's opinion in Caylor v Commissioner, it found that despite the attempts of Consolidated to make its transactions look like traditional insurance and “take advantage of the apparent loophole” at the intersection of section 831 and captive-insurance case law, the premiums paid to Consolidated and deducted by the Caylor entities are not “insurance” for federal tax purposes. However, unlike in Avrahami and Syzygy, the court in Caylor v Commissioner found that Caylor Construction cannot shelter in place behind section 6664(c), the reasonable cause and good faith defense. The court found that Caylor entities received no advice regarding Consolidated or its insurance scheme. This finding is different from those made in our other micro captive cases. The court has ordered penalties to apply across the board. Tribeca, which is owned by Artex Risk Solutions, was also involved in a case where the IRS petitioned the US District Court for the District of Delaware against the Delaware Department of Insurance (DOI) to enforce a summons for documents related to its micro captive investigation of Artex Risk Solutions or Tribeca Strategic Advisors from the Delaware DOI.
