Micro-Captive Insurers: The Tax Court Disallows Deductions Following Trial

micro captive insurance programsMicro-captive insurance schemes have caught the attention of the IRS; last year it issued a notice indicating that these arrangements have a potential for tax avoidance or evasion and designating them as transactions of interest. Notice 2016-66, 2016-47 I.R.B. 745. In a micro-captive structure, a business owner sets up an affiliated insurance company; the tax structure then works as follows:

  • The business pays premiums to the related party insurer, and it claims a business expense deduction on the premiums;
  • If the insurer limits its premium income, it can qualify to pay tax only on its investment income, not on the premiums that it receives by making an election under section 831(b) of the Internal Revenue Code;
  • The premiums accumulate creating a pool to pay claims; over time, the business may be able to reduce or eliminate its existing commercial coverage.
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Tax Procedure: A Marijuana Dispensary Cannot Enjoin an IRS Investigation Concerning Trafficking in a Controlled Substance

Marijuana, tax, IRSMarijuana is legal for medical use in over half of the states, along with the District of Columbia. It is also legal for recreational use in eight states and the District of Columbia. At the federal level, however, marijuana is classified as a controlled substance under Schedule I of the Controlled Substances Act. This dichotomy creates a variety of tricky issues for marijuana growers and dispensaries.

One problem is that the Internal Revenue Code precludes deductions for business expenses for any trade or business “if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).” I.R.C.… Read More

Compensatory Settlement Payments in False Claims Act Cases are Deductible.

While business expenses are generally deductible, fines and penalties are not. In False Claims Act cases, the government is awarded treble damages; to what extent are these payments deductible? The First Circuit addressed that question last week in Fresenius Medical Care Holdings, Inc. v. United States, 2014 U.S. App. 15536 (1st Cir. 2014) (pagination not provided by LEXIS).

Fresenius was a refund case; it grew out of a settlement of a variety of claims, including claims under the False Claims Act and criminal fines. Significantly, the taxpayer and the government were unable to agree on the appropriate tax treatment of the entire settlement.… Read More