From: Captive International
A fifth micro-captive legal case in the US has been decided entered in favour of the Internal Revenue Service (IRS), in Keating vs the IRS Commissioner, filed in the US Tax Court.
According to the court docket during the years 2012–14 (years at issue), the petitioners (Terence Keating, Cheryl Doss, and Arthur Candland) were shareholders of Risk Management Strategies (RMS), an S corporation in the business of acting as a sole employer for its clients, which were primarily banks administering special needs trusts. RMS assumed the employer liability resulting from the employment of caregivers who worked for special needs trusts, handled payroll, and generally carried out the responsibilities of being an employer to caregivers and other employees that would have otherwise fallen on its clients.
For each year at issue RMS reported incurring approximately $1.2 million of expenses for purported insurance coverage provided through an arrangement among its affiliated captive insurance company, Risk Retention, and other entities.
According to the docket the following issues were to be decided on: “whether transactions conducted through a purported microcaptive insurance arrangement among RMS, Risk Retention, and other entities during the years at issue constitute insurance for federal income tax purposes; whether expenses RMS incurred during the years at issue (a) through the purported microcaptive insurance arrangement or (b) to Artex Risk Solutions, or PRS Insurance for services rendered in connection with the arrangement constitute ordinary and necessary business expenses deductible under section 162; if not, whether any of those expenses are deductible as losses under section 165; whether dividends paid by Risk Retention to Mr. Keating and Mr. Candland in their 2012 and 2014 taxable years are qualified dividends or ordinary dividends; and whether petitioners are liable for accuracy-related penalties imposed under section 6662(a) for the years at issue.”
David Slenn, partner at legal firm Akerman, said that, the judges found that the premium payments in Keating were not deductible under IRC section 162, nor were they deductible under section 165. Further, since this involved a foreign captive, the court had to decide whether the 953(d) election was valid. Following precedent on this issue, the court held the election was invalid. The distributions from the foreign captive were found to be taxable (not qualified) dividends. The court upheld penalties.