Captive management company RMC Group and its president and CEO, Raymond Ankner, have won an important case against the Internal Revenue Service in the United States, with the assistance of law firm, ZMF Law.
In the RMC case, the jury concluded that the IRS failed to show that the captive manager was liable for Internal Revenue Code Section 6700 penalties.
Section 6700 applies to any person who organises or assists in organising “any investment plan or arrangement”, or “any other plan or arrangement”.
Such a plan is satisfied simply by ‘selling an illegal method by which to avoid paying taxes’.
The IRS had argued that “Ankner and his companies designed, sold, and managed a plan to avoid federal income taxes through unlawful deductions for supposed ‘insurance premiums’ in connection with micro-captive insurance programs.”
During the case, various witnesses testified in depositions that Ankner’s captive management services were not a “plan or arrangement” within the meaning of Section 6700 because the offered services to help unrelated clients form and manage captives was not a unitary programme.
After more than a decade disputing the issue, ZMF Law said the taxpayer was determined to owe no penalties and will receive a refund of penalties previously paid.
ZMF Law said the victory in the US District Court for the Middle District of Florida is the first of its kind for captives and represents a significant victory for both the captive industry and taxpayers.
“This is a big win for the industry,” said Matthew Reddington, a partner at ZMF Law.
“The case supports the sentiment of much of the small captive insurance industry, where there is concern that the lack of adequate guidance has made it difficult to anticipate what the IRS has now decided are the rules.”
The IRS has a history of going after micro captives – ie. those making the 831(b) election – directly in the Tax Court, winning its most recent case at the end of last month against Dr. Patel, the co-founder of an eye surgery centre and the founder of two research centres in the West Texas area.
Data recently seen by Captive Intelligence indicates that of the approximately 80 831(b) cases concluded in the US Tax Courts since 2014, no deficiencies were found in 25 of those.
Of the over 1,100 cases lodged in the US Tax Courts since 2014 for alleged unlawful 831(b) transactions, over 990 cases are still pending hearing.