Hiring an IRS Attorney Means More Trouble for Micro-Captives and Syndicated Conservation Easements

On January 21, 2022, the IRS issued a press release that it plans to hire up to 200 additional attorneys to focus on tax havens, with the initial focus on syndicated conservation easement agreements and micro-captive agreements. According to the press release, “These positions will be available in more than 50 locations, including Washington DC. Hires will provide legal advice to IRS professionals as they conduct audits of complex corporate and partnership issues and increasingly sophisticated and abusive transactions. Syndicated conservation easements have been the subject of IRS attention since Notice 2017-10 that I wrote about in a previous article. The press release states that "Abusive syndicated conservation easement deals continue to be a major focus for the IRS. These transactions typically use inflated appraisals of undeveloped land and partnerships devoid of legitimate business purpose designed to generate inflated and unwarranted tax deductions."

I think the most interesting part of this new release is that the IRS is stepping up its activity against microcaptive transactions, which negates recent speculation (including, no doubt, mine) that the IRS seemed to be ramping up its activity regarding to microcaptives. To the contrary, the new release states that: "Abusive micro-captive insurance agreements also remain a key focus of IRS enforcement. These agreements are typically sold to owners of closely held entities. The agreements commonly lack many necessary attributes of insurance, have excessive premiums, insure highly unlikely risks, and have no connection to genuine business and insurance needs.

Given that the IRS has already initiated promoter audits of the most prolific micro-captive managers, one must wonder what else the IRS will consider in the future. This most likely means that the IRS will look at the remaining three categories of micro-captive promoters that have so far escaped serious attention, being the following. First, there are some captive managers still using 831(b) joint venture agreements, which have been the primary target of IRS enforcement actions against microcaptives so far and for which the IRS is hitting a perfect 1,000. before the US Tax Court. These captive managers have thus far been able to stay off the IRS radar screen, but this warning would seem to indicate that their days are also numbered as the IRS will use its increased manpower to cast a wider net than before.

However, the insurance arrangements and risk pools used by these captive managers are often of much better quality than those of the promoters the IRS has criticized so far, such as avoiding questionable coverage for things like terrorism insurance and other dodgy policies. , and their risk pools generally operate on a first-dollar basis and may show substantial claims and losses within their risk pools. Also, your captive customers usually have a legitimate need for the insurance they are purchasing. Still, some of these captive managers have been playing some of the same games as bad promoters, such as inflating premium prices to maximize deductions for their clients' operating businesses. The second category of promoters the IRS must clean up involves so-called "captive cell" structures, where the owner of the captive is given some membership rights in a serial limited liability company (most commonly, a Delaware serial LLC, but some variants are also offshore and formed as a "cellular company"), and its operating business then buys insurance from its own series. In these transactions, there is a "Master Policy" that operates to give the appearance of pooling some of its risks to comply with the risk distribution criteria of the tax legislation.

Here, I use the term "pooling appearance" deliberately, because in reality there is no true pooling at all. All of these transactions that I have seen have an almost hidden provision that allows the group to be indemnified by the owners of the individual captives, so that the group itself has no real exposure to loss. Sometimes the promoters of these agreements will include in their reinsurance agreements with the clients' series that, in the event of losses, the client's captives will have to repay the pool, or even the operating business itself will have to repay the pool. through a device known as a "retrospective premium assessment". Or, even more cleverly, the series LLC agreement will have a provision that requires the series to compensate the larger organization for any losses. which of course means the pool. The result of these arrangements is that there is no risk shift, as the "pool series" simply acts as a trustee to hold the client's money (minus the promoter fee, of course), until the money can then be dumped into its own series. And since each client is ultimately responsible for their own losses, there is also no risk sharing. What all of these agreements ultimately come down to is that they're so complicated that the average IRS attorney can't figure them out, let alone find these backdoor agreements to protect series groups from loss, but once you've seen a Couple of these agreements, those provisions become quite easy to spot.

it simply acts as a trustee to hold the client's money (cutting the promoter's fee, of course), until the money can then be poured into its own series. And since each client is ultimately responsible for their own losses, there is also no risk sharing. What all of these agreements ultimately come down to is that they're so complicated that the average IRS attorney can't figure them out, let alone find these backdoor agreements to protect series groups from loss, but once you've seen a Couple of these agreements, those provisions become quite easy to spot. it simply acts as a trustee to hold the client's money (cutting the promoter's fee, of course), until the money can then be poured into its own series. And since each client is ultimately responsible for their own losses, there is also no risk sharing. The bottom line for all of these agreements is that they're so complicated that the average IRS attorney can't figure them out, much less find these secret arrangements to protect series groups from loss, but once you've seen a couple of these agreements, those provisions be fairly easy to spot. The third category of micro-captives the IRS is likely to consider includes new and super-abusive variants, such as the so-called "Puerto Rico deal," in which the promoter attempts to set up a front company controlled by the promoter to accept the premiums paid. by the operating company, in which the customer has no ownership interest, and then that insurance company enters into a reinsurance contract with the customer's captive.

The difference between this arrangement and a risk pool arrangement is that with a risk pool only up to 50% of premiums from the client's operating business are paid to the risk pool, with the other 50% going to the customer's captive as so-called "direct underwriting" insurance, while with the Puerto Rico agreement and similar arrangements

The idea here is that because no premiums are paid directly from the client's operating business to the captive, the deal will go unnoticed by the IRS and not be detected in an audit (and the client's captive is usually held by a trust or something). So). so that it is not connected by EIN to the customer. Sometimes more sophisticated variants are used so that the income is never collected by the client at all, but instead is held abroad, or the income is taken in a relatively low-tax quasi-domestic. jurisdiction such as Puerto Rico, from which the agreement is named. Such variants fall squarely into the type of Foster & Dunhill settlement that the Justice Department has successfully prosecuted for tax evasion, as I explained in a previous article.. Also, as with all abusive captive structures, bogus risks are covered. , the premiums are inflated, blah blah blah. All of which brings up another point, which is that now that five years ago when Notice 2016-66 on abusive microcaptive transactions was first published, there are still quite a few people who continue to sell these offerings as tax havens. Towards the end of 2021, I received a number of calls and emails from potential microcaptive clients or their advisors who had been approached with one of these deals and wanted to know if I was kosher from me. I had to give them my "Uh no," and then explain to them why these offers just don't work. They usually got the message pretty quickly and filed the deal presented to them in the circular file, but some of them were probably so eager to get a tax break that they went ahead despite being informed of the risks. The point is that despite all the IRS' s efforts against abusive microcaptives, they have been able to stop new sales from this transaction, but they have not been able to stop them completely. My own opinion remains that the IRS will never completely eliminate abusive microcaptive transactions until DOJ-TAX obtains a promoter injunction against someone or someone is charged with continuing to launch these deals.

Además de ese último punto, es importante darse cuenta de que, aunque el IRS ha tenido éxito en la adopción de medidas contra los peores promotores de microcautivas y sus clientes, incluida la victoria en los tres casos del Tribunal Fiscal de EE. UU. en los que se impugnó la transacción, aún queda un infraestructura sustancial de personas que están felizmente dispuestas a facilitar estos tratos, incluidos, lo que es más importante, los "actuarios de puta" y los suscriptores sin escrúpulos que alegremente falsificarán los números de las primas siempre que sus cheques sigan saldándose. Hasta que ya menos que el IRS tome medidas contra estos facilitadores de transacciones abusivas de microcautivas, el IRS probablemente no eliminará el problema por completo, y volverá a crecer rápidamente tan pronto como la atención del IRS se desvíe a otra parte.

De todos modos, debería ser interesante de ver, aunque con seguridad desde el margen. Probablemente no sea muy divertido si eres uno de los que están en la diana del IRS, que de repente parece estar creciendo mucho más.