On April 10th, The Tax Court issued its latest opinion involving micro-captives. In mostly finding for the IRS, the Court maintains the analytical framework set forth in its opinions in Avrahami (2017) and Reserve Mechanical (2018). It also provides a window into what happens when the IRS invalidates the 831(b) election.
The Court found that Syzygy, a Delaware captive insurance company, failed to establish that it was an insurance company for tax purposes on the grounds that it failed to properly distribute risk and that the arrangement was not “insurance in the commonly accepted sense.”
In its analysis of Syzygy’s risk distribution, the Court relied on Avrahami and Reserve, focusing on aspects of the risk pool. The insured entities in this case have 400 employees and operate in six different locations. Interestingly, the Court, however, did not analyze whether there were a sufficient number of independent risk exposure units to establish risk […]