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IRS Torpedoes: Results of Over a Decade of Promoter Shenanigans in 831(b) Captive Insurance

Beckett G. Cantley & Geoffrey C. Dietrich, IRS Torpedoes: Results of Over a Decade of Promoter Shenanigans in 831(b) Captive Insurance, The Journal Entry (July 2018).

 

Summary: The Final Legislative Changes to IRC 831(b)

In this article, Beckett Cantley provides explanation of the legislative changes, specifically geared around the two new definitional terms as well as the key addition to IRC 831(b). 

The IRS & SFC Anti-§ 831(b) Actions: Targeted or Broad Based?

Beckett G. Cantley & F. Hale Stewart, The IRS & SFC Anti-§ 831(b) Actions: Targeted or Broad Based?, Captive Visions Magazine Online (February 2015).

Summary: In this article published in Captive Visions Magazine Online, Prof. Cantley and F. Hale Stewart discuss the recent listing of certain captive transactions on the IRS Dirty Dozen list as well as the U.S. Senate Finance Committee hearings on captive insurance. Many of the issues were addressed during the ABA roundtable discussion on Monday, March 2nd. 

Relearning the Lesson: IRS Judicial Doctrine Attacks on the Captive Insurance Company Pre-Planned Tax Deductible Life Insurance Tax Shelter

Beckett G. Cantley, Relearning the Lesson: IRS Judicial Doctrine Attacks on the Captive Insurance Company Pre-Planned Tax Deductible Life Insurance Tax Shelter, 14 Hous. Bus. & Tax L.J. 181 (2014) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2567573

Summary: There are certain members of the life insurance industry that are in perpetual pursuit of the ultimate potential driver of life insurance sales---tax-deductible life insurance premiums. Some in this industry have previously used aggressive retirement plan funding, and numerous other tax vehicles for these purposes, but in the end the IRS has always succeeded in defeating such strategies through administrative enforcement and litigation. The latest attempt to achieve tax-deductible premiums is the formation of a small business captive insurance company (“CIC”) for the pre-planned purpose of using the CIC funds to invest in life insurance. The owner of a small business forms an IRC § 831(b) CIC, and pays a presumably tax- deductible premium to the CIC for business risk insurance issued by the CIC. Subsequently, the CIC uses a significant part of the tax-free premium immediately to purchase life insurance on the common owner of the small business and CIC. In general, life insurance premiums are not deductible as ordinary and necessary business expenses, and tax-deducted funds should not be used to purchase life insurance. The IRS is likely to view the CIC created and funded for the primary purpose of purchasing personal life insurance for its owner, as an abusive tax shelter.

IRS Loses Captive Insurance Case on Good Taxpayer Facts

Beckett G. Cantley & F. Hale Stewart, IRS Loses Captive Insurance Case on Good Taxpayer Facts, Tax Notes (November 17, 2014).

Summary: In this Tax Analysts article, Prof. Cantley and F. Hale Stewart discuss why they believe the next wave of captive litigation cases will be more fruitful for the IRS, and why practitioners should be cautious. Tax Notes, Nov. 17, 2014

What is Anti-Avoidance Law, and How Might it be Used by the IRS?

Beckett G. Cantley & F. Hale Stewart, What is Anti-Avoidance Law, and How Might it be Used by the IRS?, Captive Visions Magazine (October 2014).

Summary: In this article published in Captive Visions Magazine, Prof. Cantley and F. Hale Stewart discuss the basic tenets of anti-avoidance law, as well as some of the ways the IRS might apply them to the captive insurance industry. What is Anti-Avoidance Law, and How Might it be Used by the IRS?

Can An 831(b) Captive Become An Impermissible Virtual IRA?

Beckett G. Cantley, Can an IRC § 831(b) Captive Insurance Company Become an Impermissible Virtual IRA?, Captive Visions Magazine (July 2014).

Summary: This article published in Captive Visions Magazine discusses how the IRS may take issue with investments being the driving force for the formation of a captive insurance company (CIC). Can An 831(b) Captive Become An Impermissible Virtual IRA?

Risks Posed by the IRS Offshore Crackdown and Recent Case Law to International IRC 831(b) Captive Insurance Companies

Beckett G. Cantley, Risks Posed by the IRS Offshore Crackdown and Recent Case Law to International IRC 831(b) Captive Insurance Companies, Cayman Financial Review (January 15, 2014).

Summary: In this article published in the Cayman Financial Review, Prof. Cantley discusses several of the current IRS compliance issues specifically facing captive insurance companies formed in foreign jurisdictions. Risks Posed by the IRS Offshore Crackdown and Recent Case Law to International IRC 831(b) Captive Insurance Companies

Current Tax Issues with Captive Insurance Companies

Beckett G. Cantley & F. Hale Stewart, Current Tax Issues with Captive Insurance Companies, The Business Lawyer (ABA Business Law Section), January 2014 (online edition).

Summary: In this article published with the American Bar Association, Prof. Cantley and F. Hale Stewart provide an overview of several current IRS compliance issues with captive insurance companies. Current Tax Issues with Captive Insurance Companies | Business Law Section

Environmental Preservation and the Fifth Amendment: The Use and Limits of Conservation Easements by Regulatory Taking and Eminent Domain

Becket G. Cantley, Environmental Preservation and the Fifth Amendment: The Use and Limits of Conservation Easements by Regulatory Taking and Eminent Domain, Hastings West-Northwest Journal of Environmental Law & Policy, Vol. 20, No. 215 (2014)Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2387923

Summary.  Successful preservation of environmentally and historically significant property requires the utilization of various innovative land conservation strategies. The government has three alternative land conservation strategies, including (1) using the police power to issue environmental and land use regulations; (2) the use of the eminent domain power over environmentally sensitive lands; and (3) the use of conservation easement programs.

Environmental Protection or Mineral Theft: Potential Application of the Fifth Amendment Takings Clause to U.S. Termination of Unpatented Mining Claims

Beckett G. Cantley, Environmental Protection or Mineral Theft: Potential Application of the Fifth Amendment Takings Clause to U.S. Termination of Unpatented Mining Claims, Wash. & Lee 4 J. Energy Climate & Env’t 203 (2013).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2315893

Summary.  This article discusses how the invalidation and withdrawal of an otherwise valid unpatented mining claim may constitute a compensable 5th Amendment taking by the federal government. The article provides some background on federal mining claims, and discusses: (1) the process of locating and maintaining an unpatented claim; (2) the process and requirements of claim patenting; (3) the relative benefits of patenting; (4) the federal land withdrawal power under the Antiquities Act; and, most importantly, (5) 5th Amendment takings issues, including: (a) the effect of increased regulatory compliance costs, in general; (b) the effect of federal land withdrawals of otherwise valid unpatented mining claims; (c) procedures for litigating mining claim contests; and (d) a former unpatented claimholder’s standing to sue or intervene in a mining claim contest.

Repeat as Necessary: Historical IRS Policy Weapons to Combat Conduit Captive Insurance Company Deductible Purchases of Life Insurance

Beckett G. Cantley, Repeat as Necessary: Historical IRS Policy Weapons to Combat Conduit Captive Insurance Company Deductible Purchases of Life Insurance, 13 U.C. Davis Bus. L.J. 1 (2012).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2315868

Summary.  This article argues that the IRS is likely to view an arrangement where a small business owner funds a CIC for the primary purpose of obtaining deductions on owner-insider life insurance premium payments as similarly abusive to prior listed transactions involving IRC § 419 plans, IRC § 412(e)(3) plans, and IRC § 831(b) PORCs, as well as in violation of its historical tax enforcement policies against discriminatory insider tax benefits, and improper uses of key man life insurance.  The article states that the IRS should view the use of an entity as a direct conduit for achieving an impermissible tax-deductible premium payment in the same manner as it would the taxpayer taking the deduction directly.  This article discusses (1) the history of IRS enforcement and tax policy in combating improper tax uses of life insurance, and (2) evaluates the likely success of applying these historical arguments to establish that insider life insurance premiums are not deductible, nor should any tax-deducted funds be used to purchase such policies.

Steering Into the Storm: Amplification of Captive Insurance Company Compliance Issues in the Offshore Tax Crackdown

Beckett G. Cantley, Steering Into the Storm: Amplification of Captive Insurance Company Compliance Issues in the Offshore Tax Crackdown, 12 Hous. Bus. & Tax L.J. 224 (2012).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2315896

            Summary.  This article provides: (1) a discussion on the compliance issues surrounding the use of CICs; (2) a detailed discussion of the progression of the IRS offshore crackdown; (3) an analysis of the rationales for choosing an offshore jurisdiction for forming a CIC; and (4) a discussion of the IRS crackdown’s potential negative effect on the choice to utilize an offshore IRC § 831(b) CIC.

The Forgotten Taxation Landmine: Application of the Accumulated Earnings Tax to IRC § 831(b) Captive Insurance Companies

Beckett G. Cantley, The Forgotten Taxation Landmine: Application of the Accumulated Earnings Tax to IRC § 831(b) Captive Insurance Companies, 11 Rich. J. Global L. & Bus. 159 (2012).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2184420

Summary.  This article discusses: (1) the requirements, benefits, and tax attributes of an IRC § 831(b) captive insurance company (“CIC”); (2) an overview of the Accumulated Earnings Tax (“AET”) and the reasonable needs test which must be met to avoid the AET; and (3) the potential future application of the AET to an IRC § 831(b) CIC and the negative results that could arise if the IRS chooses to do so.  Given that the IRS has yet to announce any policy about applying the AET to combat the growth of this popular tax arrangement, this article seeks to analyze how the IRS may prospectively make use of this tool and how CIC owners and managers should conduct themselves to not run afoul of the IRS.

The New Section 1202 Tax-Free Business Sale: Congress Rewards Small Businesses that Survived the Great Recession

Beckett G. Cantley, The New Section 1202 Tax-Free Business Sale: Congress Rewards Small Businesses that Survived the Great Recession, 17 Fordham J. Corp. & Fin. L. 1127 (2012). Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2200210

Summary.  This article provides an overview of the IRC Section 1202 tax-free business sale provision, the history behind the development of the IRC amendments, the apparent intent for enacting the provision, the likelihood it will achieve its purposes, the statute’s ambiguities, and some policy implications of creating a tax-free business sale provision.

The U.B.S. Case: the U.S. Attack on Swiss Banking Sovereignty

Beckett G. Cantley, The U.B.S. Case: the U.S. Attack on Swiss Banking Sovereignty. 7 B.Y.U. Int’l L. & Mgmt. Rev. 1 (2011). Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1554827

       Summary.  This article’s focus is on dissecting the intricacies and arguments surrounding the U.S. attack on offshore banking in an attempt to curtail, arguably, rampant tax evasion, followed by a detailed look into the development, policy implications, and consequences of the U.S. v. UBS AG case.

The Cure Causes New Symptoms: Capital Control Effects of Tax Enforcement, Gold Regulation and Retirement Reform

Beckett G. Cantley, The Cure Causes New Symptoms: Capital Control Effects of Tax Enforcement, Gold Regulation and Retirement Reform, 7 S.C. J.Int’l L. & Bus. 75 (2010).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1893949

             Summary.  This article discusses the potential intended or unintended capital control effect of certain tax and non-tax US policies that cumulatively make investing offshore more burdensome, make investing in gold more precarious, and would radically shift the capital currently flowing into private retirement account investment vehicles into a new US government controlled retirement system at a time when the US government is running a huge deficit. This paper discusses the concepts of international and domestic capital control, the current actions of the government referenced above, and the capital control effect of these government actions.

 

Congress Giveth and Congress Taketh Away: The Slow Death of the SESOP

Beckett G. Cantley, Congress Giveth and Congress Taketh Away: The Slow Death of the SESOP, 20 Akron Tax. J. 59 (2005).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552952

            Summary.  This article discusses the cat and mouse game that had taken place between the IRS and tax planners surrounding the use of the SESOP.  The article outlines how the SESOP has been a very rich source of tax gamesmanship since its inception.  However, while Congress and the IRS have been very effective at closing all the perceived loopholes used by tax planners, they have equally been extremely adept at dismantling the SESOP as a viable planning vehicle for the average small family business.

 

The New Dividend Tax Cut: Bush’s Prescription for Rescuing the Economy

Beckett G. Cantley, The New Dividend Tax Cut: Bush’s Prescription for Rescuing the Economy, 19 Akron Tax J. 25 (2004).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552951

             Summary.  This article This article discussed President Bush’s various tax cuts contained in his 2004 “economic growth” package, including Bush’s plan to eliminate the double taxation on dividends. The article outlines the different tax cuts, the legislative process that produced them, the differing interests involved in the process and several different viewpoints on whether these tax cuts will have their intended growth effect.

           

New Tax Information Exchange Agreement: A Potent Weapon Against U.S. Tax Fraud

Beckett G. Cantley, New Tax Information Exchange Agreement: A Potent Weapon Against U.S. Tax Fraud, 4 Hous. Bus. & Tax L.J. 231 (2004).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552948

            Summary.  This article discussed the then-new information exchange agreement to the tax treaty between the U.S. and Switzerland.  The agreement established new guidelines on how to properly implement Article 26 (pertaining to information sharing) of the Convention between the U.S. and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income. The new agreement attempted to strengthen each government’s respective ability to combat tax fraud. The new agreement clarifies the tax treaty and provides guidance as to what constitutes “tax fraud” under the existing agreement by providing fourteen (14) hypothetical situations that constitute tax fraud.  The focus of this article was to discuss operational and policy elements of specific points of the new agreement followed by a discussion of what Switzerland and U.S. officials think about the possible long-term effects of the new agreement.

          

The New Tax Shelter Opinion Letter Regulations: Cutting Back a Client’s Ability to Rely on the Advice of His Counsel

Beckett G. Cantley, The New Tax Shelter Opinion Letter Regulations: Cutting Back a Client’s Ability to Rely on the Advice of His Counsel, 18 Akron Tax J. 47 (2003).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552965

            Summary.  This article analyzed certain Proposed Treasury Regulations (“Opinion Regs”) relating to the issuance of tax opinions by counsel on matters that are “reportable transactions”.  The Opinion Regs were the seemingly final piece in Treasury’s offensive against tax shelters.  The Opinion Regs put up significant barriers to a client being able to rely on advice of counsel in tax shelter matters.  The main question this article discussed was whether the inability of a client to rely on a client’s counsel on such complicated matters as tax shelters is good public policy.  This article answers the question by concluding that it is not good public policy.

         

The New Congressional Attack on Offshore Rabbi Trusts

Beckett G. Cantley, The New Congressional Attack on Offshore Rabbi Trusts, 5 Or. Rev. Int’l L 5 (2003).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1565367

            Summary.  This article discussed certain tax provisions that were contained in the draft National Employee Savings and Trust Equity Guarantee Act (“NESTEG Act”).  These provisions would have made funds held in offshore rabbi trusts immediately subject to US income tax to the beneficiary of the offshore rabbi trust.  The estimated result to the US Treasury Department would have been a significant increase in tax collection.  Offshore rabbi trusts have become common vehicles for US persons employed abroad by foreign companies to set aside retirement funds.  In addition, many offshore hedge fund managers have used offshore rabbi trusts as a means to defer income from current taxation.  This article discussed the previously proposed legislation, the likelihood of such legislation’s passage in the next Congress and the legal doctrines and tax policy implications involved in making such a change in tax policy.

           

How Long Must One Stay in the USVI to be Considered a ‘Resident’ to Qualify for the 90% Residency Tax Credit?

Beckett G. Cantley, How Long Must One Stay in the USVI to be Considered a ‘Resident’ to Qualify for the 90% Residency Tax Credit?, 13 J. Transnat’l L. & Pol’y 153 (Fall 2003).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552949

Summary.  This article analyzed the length of stay requirement for obtaining residency in the United States Virgin Islands (“USVI”).  Residents of the USVI generally file their tax returns with the USVI tax authorities rather than the IRS.  Such residents also generally make all tax payments to the USVI taxing authorities.  Residents of the USVI can be eligible for as much as a ninety percent (90%) tax credit on their personal income or investment income from ownership in certain business entities, by taking advantage of the Economic Development Commission program for investment in the USVI.  These credits have been in existence for almost fifty (50) years and are filled with historical precedent.  These credits are also safely guarded by many members of the US Congressional Black Caucus.  The article concluded that it is clear that a person must reside in the USVI on the last day of the tax year to be considered a “resident”.  However, unlike the United States, the article concluded that there does not appear to be a one hundred eighty-three (183) day residency requirement to be considered a resident of the USVI.  The article further concluded that there are a series of possible residency requirements that depend on the facts and circumstances of each case.  The article discussed many of these facts and circumstances and provides a policy argument for which ones make the most sense.

     

Corporate Inversions: Will the REPO Act Keep Corporations from Moving to Bermuda?

Beckett G. Cantley, Corporate Inversions: Will the REPO Act Keep Corporations from Moving to Bermuda?, 3 Hous. Bus. & Tax. L.J. 1 (2003).  Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552962

             Summary.  This article discussed the attempted legislative solution to the issue of “corporate inversions.”  A company undertakes a corporate inversion by forming a company in an offshore tax haven and then having the US based company become a subsidiary of the offshore company.  The result is that the offshore tax haven does not tax the offshore company on its profits and the US based company is not taxed on its offshore profits.  In addition, the US based company may also undertake an “earnings stripping” program to have significant US income redirected to the non-taxable offshore company.  The article discussed draft legislation called the “Reversing the Expatriation of Profits Offshore Act” (“REPO Act”), which would have amended the IRC in several significant ways to prevent companies from undertaking corporate inversions.  The article analyzed the draft REPO Act from an operational and policy perspective and concludes that the draft REPO Act will likely prevent corporate inversions.

             

Taxation Expatriation: Will the Fast Act Stop Wealthy Americans from Leaving the United States?

Beckett G. Cantley, Taxation Expatriation: Will the Fast Act Stop Wealthy Americans from Leaving the United States?, 36 Akron L. Rev. 221 (2003).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552967

             Summary.  This article analyzed the recently enacted legislative solution to the problem of wealthy American citizens expatriating to a foreign nation to avoid taxes.  The article also discussed the last major attempt to prevent tax expatriation through the enactment of IRC Section 877 and the fact that Section 877 was being easily circumvented by tax expatriates and their advisors.  To stem the tide of tax expatriation, certain tax provisions were added to the Foreign and Armed Services Tax Fairness Act (“Fast Act”) that would bolster the previsions existing under Section 877.  Under the draft Fast Act, two of the ways tax expatriates will be punished are by (1) treating all of the tax expatriate’s holdings as if they had been sold the day before expatriation, thereby triggering all inherent capital gains on the holdings and (2) requiring that estate taxes due from the death of a tax expatriate be collected against a domestic heir of the tax expatriate, rather than the tax expatriate’s estate.  The article analyzes the operational and policy implications of the FAST Act, and concluded that while it adds additional deterrents to tax expatriation, it cannot eliminate it.

        

United States v. KPMG

Beckett G. Cantley, United States v. KPMG: Does Section 6103 Allow the IRS to Put Taxpayer Names on the Front Page of the Wall Street Journal?, 50 Clev. St. L. Rev. 1 (2002-2003).  Link:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552950

             Summary.  This article discussed whether the IRS violated Section 6103 of the Internal Revenue Code (“IRC”) when it disclosed the names of several prominent taxpayers in a public lawsuit involving KPMG, a “Big Four” CPA firm.  The disclosure lead to a Wall Street Journal article titled “IRS Releases Names of People in Disputed KPMG Tax Shelters”.  Section 6103(a) sets forth the general rule that taxpayer “return information” is generally confidential, subject to certain limited exceptions.  Section 6103(b)(2) provides that “return information” includes taxpayer names as well as other information.  The article concluded that it is likely that the United States (“US”) violated the general rule of Section 6103 because the US improperly disclosed taxpayer names in the KPMG case.  However, the article further concluded that it is unlikely that the named taxpayers would recover damages because the US is likely to meet the exception where the disclosing party has a good faith, but erroneous, interpretation of Section 6103.

The Tax Shelter Disclosure Act: The Next Battle in the Tax Shelter War

Beckett G. Cantley, The Tax Shelter Disclosure Act: The Next Battle in the Tax Shelter War, 22 Va. Tax Rev 105 (2002). Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1551208

            Summary.  This article analyzed the most important sections of the draft “Tax Shelter Disclosure Act” (“TSDA”), including the significant amendments to the Internal Revenue Code that would have been made by the TSDA.  Two of the main provisions of the TSDA define what constitutes a “tax shelter” and raise the penalties associated with tax shelters.  The article synthesized and analyzed the criticisms of several important organizations who issued public comments on the legislation and provided policy assessments of its likely benefits and burdens.