Last month, the Internal Revenue Service (the “IRS”) notched another win at the U.S. Tax Court (the “Tax Court”).[1] In its opinion, the Tax Court commented that it has decided seven cases involving similar captive insurance arrangements, all decided in favor of the IRS. The usual red flags pertaining to circular funds, premium calculations independent of loss experience, and sudden increase in claims following IRS inquiry are all present. In this instance, the Tax Court considered a new factor – the tribal domicile.
This case involves a captive insurer domiciled in the Sac and Fox Nation. Per the Tax Court’s opinion, the captive manager had initially considered Nevis, a Caribbean offshore jurisdiction, but chose against Nevis “because captive insurance entities created there had become a focus of IRS attention.” The captive manager then considered the Delaware Tribal Nation, but per the opinion, the Delaware Tribal Nation had no record of receiving an application from the captive manager.[2] Ultimately, the Sac and Fox Nation was chosen which at the time “had no law governing insurance companies and no insurance regulatory authority.”[3] The company was incorporated “as an ordinary domestic corporation in the Sac and Fox Nation.” Furthermore, “[t]here is no credible evidence that RMIC was organized, operated, or regulated as an ‘insurance company.’”[4]
Per the Tax Court’s opinion, it appears that the captive manager went in search of a tribal domicile as an alternative to an offshore domicile. While a Tribal Nation domicile may be a good option in some instances, a Tribal Nation that does not have an insurance regulatory authority is a red flag which invites scrutiny. The lesson specific to this case is that domiciles matter.
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[1] Royalty Management Ins. Co., Ltd. v. Comm’r, T.C. Memo. 2024-87 (September 16, 2024).
[2] Id. at 14.
[3] Id. at 36.
[4] Id.
