“Small Captive Insurance Concession May Mean New Enforcement Phase”

Article by Patrick McCann on “Small Captive Insurance Concession May Mean New Enforcement Phase”

In an article published in Tax Notes on January 10, 2021, Atlanta-based Associate Patrick McCann discusses the recent Puglisi decision and the determination of whether an insurance transaction is valid for federal income tax purposes.

“A recent development in the Tax Court may signal the start of a new era for the IRS and its ongoing coordinated campaign targeting transactions involving small captive insurance companies,” explains McCann. “On October 29 Judge David Gustafson entered an order in Puglisi that granted the commissioner’s motion for entry of decision conceding the tax and penalties in full.”

He further outlines how the commissioner had previously asserted tax deficiencies and penalties totaling more than $2.7 million related to deductions that Puglisi Egg Farms of Delaware LLC claimed for insurance premium payments to an affiliated insurance company that elected federal tax treatment under section 831(b).

McCann concludes that the pandemic caused by COVID-19 has highlighted the important role that captive insurance companies can play in light of the significant limitations of insurance coverages purchased in the traditional commercial insurance market.

“For taxpayers that formed their captive insurance companies for legitimate insurance purposes, the decision to concede in Puglisi offers hope that the government’s enforcement activities will be limited to abusive transactions and allows them to continue to rely on their captive insurance companies as part of their overall risk management program,” said McCann.

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