U.S. Tax Court Sustains 40 Percent Accuracy-Related Penalties in Microcaptive Insurance Case

The U.S. Tax Court held that a taxpayer’s microcaptive insurance arrangement lacked economic substance under section 7701(o) and upheld the imposition of 40 percent accuracy-related penalties under section 6662(b)(6) and (i) for nondisclosed noneconomic substance transactions. Taxpayers, through their closely held S corporation, paid premiums to related captive insurers and claimed deductions for those premiums as insurance expenses. In a prior opinion, the court determined that those payments were not deductible and sustained 20 percent accuracy-related penalties. Following additional briefing, the court concluded the arrangement failed both prongs of the economic substance test. The court applied the increased 40 percent ...