In 2016, the IRS identified certain microcaptive insurance arrangements as “transactions of interest,” predicting that there would eventually be examinations of captive managers resulting in tax shelter penalties. In 2021, microcaptive promoter Celia Clark was assessed $11 million in Section 6700 penalties by the IRS. Ms. Clark filed a refund lawsuit, which was eventually settled on undisclosed terms. This was just the beginning of the IRS’s action against microcaptive promoters.
Following Ms. Clark’s case, Raymond Ankner, a life actuary indirectly providing captive management services through his affiliated companies, was assessed 6700 penalties by the IRS. In response, Ankner and his companies filed a refund lawsuit, which went to trial before a jury. The jury ruled in favor of Ankner and his companies against the IRS on all counts.
As this case involved a jury verdict on facts rather than a judge’s ruling on law, there are no technical issues to discuss. Ankner’s low profile as a microcaptive marketer likely worked in his favor, as there was no evidence of misconduct in his operations. None of Ankner’s microcaptive clients have lost in the U.S. Tax Court, indicating a lack of intentional wrongdoing on Ankner’s part.
To assess 6700 penalties, the IRS must demonstrate that a promoter acted with scienter, knowingly engaging in wrongful actions. In contrast to other cases where evidence of shady practices was abundant, Ankner and his companies did not have any such evidence against them. This lack of misconduct made it difficult for the IRS to argue their case against Ankner.
While the IRS could potentially win a promoter penalty case without a client losing in Tax Court, the lack of such a case makes it harder for the IRS to prove wrongdoing. Moving forward, there may be more cases like Ankner’s, with the IRS targeting easier microcaptive manager targets. These cases may involve more trials and verdicts that do not go in the IRS’s favor.
Overall, the Ankner case highlights the complexities of microcaptive arrangements and the challenges of proving intentional misconduct by promoters. As the IRS continues to pursue cases against microcaptive promoters, the outcome of each case will depend on the specific facts and evidence presented. Despite the Ankner verdict, there may be more trials and settlements in the future as the IRS seeks to enforce tax laws related to captive insurance arrangements.
