Tax Court Examines Tribal-Domiciled Captive Insurer in Recent Case

According to an October 17, 2024, article on JD Supra, titled "IRS Wins Against Tribal-Domiciled Captive Insurer," authored by Daniel Barry of Locke Lord LLP, the Internal Revenue Service (IRS) recently secured a win in the US Tax Court regarding a case involving a captive insurer domiciled in a tribal nation. As Mr. Barry notes, this ruling is part of a broader trend, with the Tax Court ruling in favor of the IRS in seven cases involving similar captive insurance arrangements. Several key issues commonly associated with IRS scrutiny, such as circular funds and questionable premium calculations, were once again present in this case. For more details, you can read Eversheds Sutherland's analysis on Captive.com in the article "Royal Management: Another 831(b) Tax Court Decision."

Per the article, the captive insurer in question was domiciled in the Sac and Fox Nation, a tribal nation that at the time lacked both insurance laws and regulatory authorities. Initially, the captive manager considered domiciling the insurer offshore in Nevis but ultimately chose the Sac and Fox Nation as a domicile after determining that Nevis had become a target for IRS investigations. The article explains that the decision to domicile within the Sac and Fox Nation was also influenced by the fact that another potential location, the Delaware Tribal Nation, had not received the captive manager's application.

According to Mr. Barry, the key takeaway from this case is the importance of domicile choice for captive insurance companies. While tribal nations may sometimes be a viable option, the absence of a structured insurance regulatory authority, as was the case with the Sac and Fox Nation, presents significant red flags and opens the door to greater scrutiny from the IRS. The court concluded that the captive insurer in question was not organized, operated, or regulated as an insurance company, which ultimately worked against it in the ruling.