Summary of Articles on Abusive Captive Insurance Companies

Abstract

Following up on Prof; Beckett G. Cantley' presentation at BYU on the current abuses he's seen related to Internal Revenue Code (“IRC”) 831(b) Captive Insurance Companies (“CIC”), this memorandum (“memo”) summarizes some of his published law review articles in the area. There seems to be a significant amount of such abusive activity in the Intermountain West region, with promoters advocating the use of CICs in ways the IRS will be unlikely to tolerate, and without the economic substance essential to withstand an IRS attack. This memo is written in hopes of preventing CPAs and other professionals from being unwittingly drawn into an IRS battle they did not anticipate. This memo sets forth some of the primary ways in which promoters operate, analyzes the law and policy surrounding their course of action, and the likely result of IRS attack on the taxpayer. In particular, this memo discusses some of the issues that may develop with the IRS that are typically not raised with CIC clients or their professionals. Some of these problem areas include: (1) life insurance as an “investment” of the CIC; (2) the risks posed by the IRS offshore crackdown; (3) excessive premiums & terrorism insurance; and (4) estate planning ownership structures.