Several U.S. Tax Court opinions regarding microcaptive transactions have been issued this year, with the most recent being Patel v. CIR. This case involved a doctor in Abilene, Texas, named Sunil S. Patel, who worked with captive manager CIC Services, LLC and tax attorney James Coomes to form a captive insurance company called Magellan Insurance Company in St. Kitts. The formation of Magellan, owned by the doctor, his wife, and a trust for their children, was primarily focused on financial and tax benefits rather than risk management.
No feasibility study was conducted before Magellan was formed, and the premiums paid to it were used to purchase a life insurance policy from Minnesota Life Insurance Company, among other transactions. When the IRS began scrutinizing Magellan, the doctor, Coomes, and others formed a second captive called Plymouth Insurance Company in Tennessee, with a complex reinsurance agreement involving Capstone Reinsurance Company, Ltd. in the Turks & Caicos Islands.
The court found that the premiums charged by Magellan and Plymouth were artificially inflated to reach the limit allowed by tax law, without proper actuarial justification. Additionally, the reinsurance premiums were not based on actuarial calculations, leading to a circular flow of funds between the captives and Capstone Re. Furthermore, members of CIC Services involved in managing the captives also owned a captive participating in the same risk pool, raising conflict of interest concerns.
The court determined that Magellan and Plymouth did not provide insurance in the commonly accepted sense as they lacked risk distribution and did not operate as real insurance companies. Premiums charged were disproportionate to the coverage provided, raising further red flags about the legitimacy of the captives. The court also criticized Allen Rosenbach of ACR Solutions Group for his flawed risk analysis and premium calculations.
In conclusion, the court ruled that the insurance transactions involving Magellan and Plymouth were not deductible for federal tax purposes. The case highlighted the flaws in the microcaptive structure, emphasizing the importance of proper risk management and actuarial justification in forming a captive insurance company. While the case may not be appealed due to its overwhelming similarities to other microcaptive cases, the use of life insurance in captives and potential implications for promoter penalties remain relevant topics for future cases.
