In recent years, the IRS has been cracking down on microcaptive insurance arrangements, particularly those involving captive insurance companies that have made the 831(b) election and are meeting risk distribution through risk pools. Promoter examinations have been initiated, resulting in the assessment of tax shelter penalties, also known as 6700 penalties. One such case involved microcaptive promoter Celia Clark, who was assessed with $11 million in Section 6700 penalties and subsequently filed a refund lawsuit against the IRS. The case eventually settled on undisclosed terms, marking the beginning of the IRS’s actions against microcaptive promoters.
Another prominent case involved Raymond Ankner of Naples, Florida, a life actuary who provided captive management services to microcaptive arrangements through his affiliated companies. The IRS assessed 6700 penalties against Ankner and his companies, leading to a refund lawsuit filed in the U.S. District Court for the Middle District of Florida. The case went to trial before a jury, resulting in a verdict in favor of Ankner and his companies against the IRS on all counts. This jury verdict was based on the facts presented, with no significant technical issues at play.
Despite not being a high-profile marketer of microcaptives, Ankner successfully navigated the legal proceedings, potentially due to his low profile and lack of aggressive marketing tactics. Importantly, none of Ankner’s microcaptive clients have lost in the U.S. Tax Court, indicating a clean track record for Ankner and his companies. In contrast to other cases where evidence of misconduct was abundant, there was little evidence of Ankner engaging in any wrongdoing, making it difficult for the IRS to prove scienter in assessing 6700 penalties.
The complexities of captive insurance arrangements, risk shifting, and tax shelter regulations can be challenging for jurors to navigate, making it essential for the IRS to present clear evidence of wrongdoing. While backdating documents and manipulating numbers have been prevalent in other cases, Ankner and his companies avoided such conduct. The absence of damaging evidence may have worked in Ankner’s favor, highlighting the importance of establishing intent to prove promoter penalties in such cases.
This case serves as a reminder of the potential consequences faced by microcaptive managers, as the IRS continues to target those involved in questionable arrangements. While Ankner and his companies emerged victorious in this instance, there are likely more cases on the horizon, with easier targets for the IRS to pursue. Moving forward, it is expected that more trials will take place, potentially leading to verdicts that favor the IRS in cases where clear evidence of misconduct is present. The outcome of these cases will have implications for the future regulation of microcaptive insurance arrangements.
