8. Lawsuits, court rulings put pressure on microcaptives

Microcaptives came under fire in 2018 as IRS scrutiny of the vehicles continued.

In December, Arthur J. Gallagher & Co. was hit with a class action lawsuit alleging that its captive management unit, Artex Risk Solutions Inc., had promoted the use of 831(b) captives that resulted in captive owners illegally reducing their taxes.

According to the suit, a group of Arizona-based businesses that had set up 831(b) captives managed by Artex had to pay back taxes, penalties and interest to settle IRS investigations into the use of the captives. The businesses alleged that Artex should have known the captive strategies it promoted were illegal tax shelters.

Gallagher responded to the suit saying the allegations were similar to past claims that it had successfully defended.

The story detailing the allegations was the eighth most read risk management story on Business Insurance’s website in 2018.

Earlier in the year, microcaptive proponents were dealt another blow when a U.S. Tax Court judge ruled that a microcaptive for a mining company was not operated as “bona fide insurance company.” According to ruling, the mining company benefited from the tax advantages afforded to captives, but the captive bore little real risk.

The June ruling by the Tax Court followed a 2017 ruling by a different judge at the court in the so-called Avrahami case that was also a victory for IRS.

More 831(b) rulings are pending in the Tax Court.