Back in 2016, when the IRS issued Notice 2016-66 that designated certain microcaptive insurance arrangements as “transactions of interest,” I predicted that eventually there would be promoter examinations of at least some of the captive managers of captive insurance companies that had made the 831(b) election and were meeting risk distribution through risk pools, and that these promoter exams would result in the assessment of tax shelter penalties, a/k/a 6700 penalties (named after the Revenue Code section where those penalties are found). In 2021, I wrote about microcaptive promoter Celia Clark — who had featured prominently in several of the U.S. Tax Court opinions where the microcaptive owners had all lost and badly — being assessed such penalties and that she had filed a refund lawsuit, as related in my article, Former Microcaptive Promoter Sues IRS After Being Assessed With $11 Million In Section 6700 Penalties (Dec. 11, 2021). Ms. Clark and the IRS eventually settled that case on undisclosed terms, but at any rate that was only the start of the IRS’s activity against microcaptive promoters.
Next up was Mr. Raymond Ankner of Naples, Florida, who was a life actuary (but not a property & casualty actuary), who indirectly through three of his affiliated companies called CJA & Associates, Inc., RMC Property & Casualty, Ltd., and RMC Consultants, Ltd., provided captive management and related services (including a risk pool to distribute risk for tax purposes) to microcaptive arrangements. In short, the IRS assessed 6700 penalties against Ankner and his three companies, and to avoid those penalties they filed a refund lawsuit in the U.S. District Court for the Middle District of Florida. This case did not settle, however, and instead went to a trial before a jury. In the end, the jury entered a verdict in favor of Ankner and his companies and against the IRS on all counts.
As this was a jury verdict on the facts and not the judge’s ruling on matters of law, there are no biting technical issues to discuss here. Readers who desire to know more about this case can read the following documents, in addition to the rest of the court documents that can be obtained through PACER:
· Complaint For Refund
· Answer To Amended Complaint And Counterclaim
· Order On Motion For Summary Judgment
· Jury Verdict Forms
· Judgment On Jury Verdict
What follows now are purely my musings upon this case and the verdict. As always, to the extent my musings differ in any way from those contained in the documents filed in the case, the latter control.
My first thought on hearing about this case was “Who the heck is Ray Ankner?” I had never heard of him or his companies, although I have been involved in one form or another with the captive insurance industry since the mid-1990s. It seems that Ankner was not a high-profile marketer of microcaptives, but rather flew under the radar screen for years before popping up in this case. Not being a high-profile marketer was very likely a fact in his favor, as opposed to some of the other microcaptive promoters who had sizeable and aggressive marketing staff and were as visible on the radar as the Goodyear blimp. So the fact that I had never before heard of Ray Ankner before merits a “well done” to him for not getting the reputation as an aggressive marketer or microcaptives. Doubtless, this helped him at trial indirectly.
Most importantly, at least as I see it, is that as of this date none of the microcaptive clients of Ankner and his companies have lost in the U.S. Tax Court, at least so far as I am aware. The importance of this cannot be overstated, since in the Tax Court opinions we have seen so far there was an abundance of evidence which came out during the trial about captive managers doing everything from convincing their affiliated actuaries to fudge the premium numbers, to backdating documents, and to utterly ignoring the economic realities about what was going on. But there was no record (again, at least as far as I am aware) of Ankner and his companies engaging in any such misconduct.
All of this is important because to assess the 6700 penalties, the IRS must demonstrate that a promoter acted with scienter, which basically means that they were taking actions that they knew to be wrong. In the Tax Court opinions so far, there has been an abundance of evidence of the involved captive managers intentionally doing shady things, but there doesn’t seem to have been much of any such evidence in this case.
Think of it this way: A jury consisting of ordinary folks will upon being told about complicated captive arrangements, risk shifting, risk distribution, and the technical aspects about what does or does not constitute a tax shelter, will probably cause to folks to get lost in the weeds pretty quickly. It is very hard for even experienced financial professionals to grasp these concepts, much less a conglomerate of folks whose sole qualifications to serve on a federal jury is that they be registered voters.
By contrast, things like backdating documents or telling somebody to fudge numbers is something that even the least financially savvy juror can sink their teeth into pretty quickly. This type of evidence has existed in abundance in the Tax Court cases so far, but there doesn’t seem to have been any of it in the case of Ankner and his companies. The upshot is that the IRS will have a much easier time making their promoter penalties case against a microcaptive manager who had at least one client blow up in the Tax Court, and a correspondingly worse chance if that same manager has never had a client even suffer a judgment before the Tax Court.
This doesn’t mean that the IRS could not win a promoter penalty case without a taxpayer blowing up in Tax Court, far from it. What it does mean is that if there hasn’t been a Tax Court case, the IRS had better have developed a boatload of admissible evidence that the microcaptive manager undoubtedly knew that what they were doing was wrong.
This is probably not the last such 6700 penalty case that we will see, and there are certainly much easier targets for the IRS to go after when it comes to microcaptive managers, including a few whose clients have indeed blown up (and “they blow’d up real good” in the words of the late Billy Sol Hurok). There is no reason for the IRS to settle those cases where the microcaptive manager had been caught in some sort of obvious mischief, so we will probably see more trials and some verdicts that go the other way.
Stay tuned.
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