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commercial insurance is not available,
In its recent hiring such as avian influenza, and formed a There are many
captive insurance company managed by
initiatives, the Oxford Risk Management Group. Prior microcap tives with
Service has signaled to going to trial, the IRS conceded, for litigation currently
undisclosed reasons, almost all taxes and
its continuing penalties assessed under Sec. 6662. pending with the
commitment Following the Mann and CIC Services IRS. There are
to pursue rulings, the question remains whether indications from
the IRS will continue to litigate similar
microcaptives. cases in other courts, or if more cases recent microcaptive
will be resolved similarly to the Puglisi cases that the
case. The Service might also decide to
IRS may be
The penalty is generally 75% of the issue a new notice or promulgate regula-
reduction in tax as a result of participa- tions, as discussed next. reevaluating its
tion in the transaction but not less than
$5,000 for an individual and $10,000 for IRS could issue a new notice litigation efforts
based on CIC
any other case. The maximum annual One alternative for the IRS is to issue a
penalty under Sec. 6707A is $10,000 new notice for microcaptives that would
for an individual and $50,000 in any allow for a notice-and-comment period, Services.
other case. given that the CIC Services and Mann
The IRS may also impose accuracy- decisions limit the Service’s ability to new notice involves potential delay.
related penalties under Sec. 6662 or make transactions reportable without If the IRS believes the information
6662A for reportable transaction under- following APA procedures. There are collected on the Forms 8886 is valuable
statements. The accuracy-related penalty several potential concerns with this op- and difficult to ascertain through other
under Sec. 6662A is 20% (or 30% in tion from the IRS’s perspective. auditing techniques, it may be beneficial
certain circumstances) of the reportable Arbitrary and capricious to invest the time and effort to draft
transaction understatement. standard remains a concern: One a new notice. However, the drafting
potential worry for the IRS is that mi- process and notice-and-comment period
IRS’s possible next steps on crocaptive owners and advisers might may result in a lengthy time delay.
microcaptives challenge a new notice as being arbitrary During this review period, microcaptive
Only time will tell how the district and capricious. The CIC Services court activity may go unreported or there may
court’s decision in CIC Services will af- emphasized that there must be evidence be significant confusion about current
fect microcaptive litigation in other cir- in the administrative record that the reporting requirements.
cuits. There are many microcaptives with IRS “examined the relevant data” and
litigation currently pending with the provided a satisfactory explanation for IRS regulations could clarify
IRS. There are indications from recent reaching the decision to make micro- valid microcaptives
microcaptive cases that the IRS may be captives reportable transactions based Another option for the IRS is to issue
reevaluating its litigation efforts based on the potential for tax avoidance or proper regulations for microcaptives.
on CIC Services. evasion. The IRS would need to demon- Properly issued guidance (i.e., what the
For example, in October 2021, fol- strate, with sufficient data and research, courts ruled was not done in Mann or
lowing the Supreme Court decision in that microcaptive transactions run the CIC Services) is designed to produce
CIC Services, the IRS conceded its $2.7 risk of tax avoidance or evasion in order sensible, meaningful, and clear rules
million Sec. 831(b) microcaptive case for a new notice to be valid. with at least some public input. In this
against Puglisi Egg Farms.12 Puglisi Egg Notice and comment could result instance, regulations could provide
Farms, a privately held Delaware egg in a lengthy delay: Another potential clarity to taxpayers to determine what
farm, sought to cover risks for which concern for the Service with issuing a is and what is not a valid microcaptive

12. Puglisi, No. 4796-20 (Tax Ct. 10/29/21) (unpublished order).

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