Just a few years ago, captive insurance companies were a hot news item in the arcane world of abusive tax shelters. Sleazy promoters were signing up small businesses in droves. If you created a cell captive as a property and casualty loss management tool, it’s probably legitimate. If you “bought” an off the shelf captive from a promoter who promised tax savings, there is a good chance you own an abusive tax shelter.
After the initial wave of fraud and audits, many of the bad promoters went away. New reports suggest that captives are again making a comeback. And with the next generation of captives will come the inevitable fraudsters looking to catch a free ride on the resurgent popularity of these products.
The new wave of captive insurance companies are sometimes called cell captive insurance companies or “group captives.” We have also seen them called rent-a-captive, segregated account companies, segregated portfolio companies and incorporated protected cell companies. Whatever they are called, if properly set up they can be completely legal and valuable risk management tool.
The IRS issued a bulletin in 2008 to give guidance on these products including whether premiums can be deductible as insurance costs. The IRS says there must be adequate risk shifting and distribution to be considered “insurance.”
The scam promotions typically offer to shelter a large sum of money by calling it an insurance premium. The premium is usually the same dollar amount as the deduction you seek. The promoter offers “insurance” on a highly improbable risk. Hurricane insurance in Nebraska, anyone? Magically, you get a big deduction and in a few years you are promised the ability to get back your money in the form of a “premium refund” or dividend. Sound familiar? You probably purchased an abusive tax shelter.
If you think that you have one of these products, seek legal help immediately. First, the premiums in bogus captive insurance companies or cell captives are not deductible. That has significant tax implications and likely involves big civil penalties too.
Because the IRS views many of these schemes as abusive tax shelters, there are special penalties that apply. If the IRS finds that your captive insurance resembles an illegal welfare benefit scheme (sometimes called 419 or 412 plans), your plan might be considered a listed transaction subject to penalties of $100,000 or more per year.
Abusive tax shelters can also be criminally prosecuted.
Another danger is that in many of the cell captive frauds, the money is simply not there when you go to cancel the policy and seek a refund of premiums.
It’s not always promoters who sell the bad plans. We know of otherwise honest insurance agents and even accountants who were roped into selling these products. Many promoters lure agents into their scheme by offering legitimate looking “legal” opinion letters and slick marketing materials. If an agent or accountant sold or recommended the plan, you may still be able to recover your damages if the promoter – and your money – is long gone. (Insurance agents love these plans because they usually pay above average commissions – another red flag.)
According to a recent story in Captive Review, Bahamian cell captives have “risen from extinction” and are making a dramatic resurgence. Cell captives are currently offered in Guernsey, Jersey, Malta, Gibraltar, Isle of Man, Bahamas, Bermuda, the British Virgin Islands, Anguilla and Dubai. In the United States, they may be offered in Nevada, Washington, Montana, Hawaii, Kentucky, South Carolina and Oklahoma. Because they can be created in certain states doesn’t mean they pass IRS muster, however.
Whatever you do, don’t wait until the IRS finds you or until you discover that your premium refund isn’t coming. If you have questions about your cell captive or captive insurance company, give us a call. We also represent owners of phony welfare benefit plans, 419 and 412 plans. Our tax and fraud lawyers can help you determine if your cell captive or other plan is legitimate and if not, unwind the transaction and get back your hard earned money.
For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Minneapolis, Minnesota; Portland, Maine and San Francisco, California. Services available in many jurisdictions.
Want more information on cell captives or abusive tax shelters? Our Due Diligence blog has a search engine located in the upper right hand corner.
Posted by Brian Mahany, Esq.