Tax Court Finds ‘Circular’ Microcaptive Justifies IRS Penalties

The president of an engineering company is on the hook for tax deficiencies and penalties after the US Tax Court agreed with the IRS that the company’s microcaptive insurance arrangement didn’t actually provide insurance.

Curtis Kadau was assessed the tax for the years 2012 to 2017 after the IRS determined that payments made by Surface Engineering & Alloy Co. to an affiliated company purportedly for insurance purposes weren’t actual insurance premiums.

Therefore, they can’t be deducted as business expenses under IRC Section 162.

A microcaptive insurance arrangement involves a company establishing an affiliated entity to serve as a self-insurer, ...