Substantial § 6700 Promoter Penalty Case Involving Refund Suit and Counterclaim Settled for $5,200,000 (5/25/24)

In Clark v. United States (S.D. Fla. 9:21-CV-82056), CL docket entries here, the taxpayer, Celia R. Clark, an attorney active in the promotion of microcaptive insurance companies for certain claimed tax advantages, brought a suit for refund of § 6700 penalties in the amount of $1,745,544. That amount represented 15% of the aggregate § 6700 penalties of $11,636,919 required in order to meet the jurisdictional requirement (special rule to avoid the Flora full payment requirement) for refund suits for the § 6700 penalties. See Complaint, here, paragraphs 65-67). (Actually, the aggregate amount paid was slightly in excess of 15% of the aggregate penalties.)

The 6700 penalty here for false or fraudulent misstatements as to a material matter is 50% of the gross income derived or to be derived from the penalized conduct. The penalized conduct is the organization or participation in a plan or arrangement in which the person furnishes or causes to be furnished a statement that the person “knows or has reason to know is false or fraudulent as to any material matter.”  being the organization or participation in the sale of a plan or arrangement that claims false tax benefits. I discuss the  § 6700 penalty and the § 6703(c) relief from Flora full payment requirement in my Federal Tax Procedure Book (Practitioner Ed. 2023.2), here, at pp. 853-856.

In the Government’s Answer and Counterclaim, here, the Government responded to the allegations in the complaint and sought judgment for $10,095.359 (Answer pp. 26-27, which seems to be the net amount after application of Clark’s payments with some add-ons.) Among the allegations in the Answer and Counterclaim are (i) a mélange of facts implying or proving (if proved) that Clark knew or had reason to know of the falsity of the scheme and documents implementing the scheme (Answer pp. 16-25, ¶¶ 16-85) and (ii) “From 2008 through 2016, Clark, through her law firm, earned over $23 million in fees from the microcaptive insurance programs.” (Answer p. 25 ¶ 87.) I infer that the alleged aggregate fee amount was the basis for the penalties exceeding $11 million.

Tax Court Judge Gustafson Enters Order Permitting IRS to Concede Without Merits Decision (11/6/21)

In an order in Puglisi v. Commissioner (T.C. Dkt Nos. 4796-20, 4799-20, 4826-20, 13487-20, 13488-20, 13489-20 Order served 10/29/21), here, the Tax Court (Judge Gustafson) permitted the IRS to concede the deficiency adjustments related to the taxpayers' microcaptive insurance and thus move to decision in the case.  Readers know that the IRS believes – strongly believes—that many forms of microcaptive insurance are abusive.  Many microcaptive deficiency cases are pending, and, of course, the Supreme Court recently held in CIC Svcs., LLC v. IRS, 593 U.S. ___, 141 S.Ct. 1582 (2021) that the material advisor reporting requirement imposed by IRS Notice for abusive microcaptives could be subject to pre-enforcement review.  As to CIC, see Supreme Court Holds in CIC Services that IRS Micro-Captive Notice May Be Contested Pre-Enforcement (5/17/21; 5/18/21), here.

In the Puglisi Order, the IRS conceded all of the adjustments related to the microcaptive insurance. Typically, if the IRS concedes, the taxpayer may be more than willing to accept the concession and move on, perhaps trying to recover attorney fees and costs under §7430.  In this case, the taxpayers apparently are unable to recover under § 7430 "' because of the technical limitations of I.R.C. section 7430.'”  (Slip Op. 6.) Here, the taxpayers do not want to move on but want to litigate the merits of the issues the IRS conceded. What is going on that requires an order of 17 pages?

The taxpayer speculates, as recounted in the Order, that (Slip Op 8-9):

Respondent has now concluded that he wants to abandon the tax deficiencies asserted in his notices of deficiency, apparently because he recognizes that Petitioners' cases are not the litigation vehicles that he wants to use to present his theories to this Court. But while Respondent is willing to abandon the asserted deficiencies, he is not willing to concede the inaccuracy of his determinations underlying the adjustments * * *. [The motions for entry of decision make a] strategic attempt to “concede” the overall amounts at issue, in order to avoid an adverse ruling on the specific determinations in the notices of deficiency * * *.

Judge Gustafson addressed the IRS’s litigating strategy later (Slip Op. 16-17):

District Court Enforces Summons to Delaware Dept of Insurance for Micro-Captive Information (10/4/21)

The district court has enforced the IRS summons issued to the Delaware Department of Insurance (“DDOI”) for information and documents on about 200 micro-captive insurance companies that DDOI issued certificates of authority.  United States v. Del. Dep't of Ins., No. 20-829, 2021 U.S. Dist. LEXIS 186623 (D. Del. Sep. 29, 2021), CL here.  I previously wrote on the Magistrate’s Report and Recommendation (“Report”) to enforce the summons.  Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (Federal Tax Procedure Blog 7/19/21), here.  Substantial portions of the district court’s Background are simply a copy and paste from the Magistrate’s Report.

DDOI raised arguments of error in the Magistrate’s Report related to the interpretation and application of the McCarran-Ferguson Act (“MFA”):

(1) by applying a “threshold test” of whether the conduct at issue constitutes the business of insurance for a non-antitrust case; and (2) by determining that the challenged conduct does not constitute the “business of insurance.” DDOI also argues that the Report erred by failing to recommend dismissal of the Petition on the grounds that the MFA reverse-preempted the Summons.

The resolution of this issue gets into arcana of the MFA, so I won’t delve into it here in detail.  In summary, the district court held that, in non-antitrust cases, there was a threshold requirement for MFA that the activity in question constitute the business of insurance.  In doing so, the district court has an interesting discussion of precedential authority in the Third Circuit regarding whether a subsequent panel opinion that seems inconsistent with an earlier panel precedential decision can reverse the earlier holding without en banc consideration.  The Court finds that, under Third Circuit, authority, the prior precedential opinion controls.  Interesting.

The district court also affirmed the Magistrate’s Report’s finding that the activity in question was record maintenance rather than insurance subject to MFA.

The district court then summarily rejected the DDOI argument for reverse preemption under the MFA.

Magistrate Judge Recommends Enforcement of IRS Summons to Delaware Dept of Insurance for Information Filed by Micro-Captives (7/19/21)

In United States v. Del. Dep't of Ins., Civil Action No. 20-829-MN-CJB, 2021 U.S. Dist. LEXIS 132716 (D. Del. July 16, 2021), here, the magistrate issued a Report and Recommendation that the IRS summons to the Delaware Department of  Insurance (“DDOI”) be enforced to compel production of documents related to “Artex Risk Solutions, Inc. (“Artex”), Tribeca Strategic Advisors, LLC (“Tribeca”) (which is owned by Artex) and others, in transactions involving micro-captive insurance plans.”  The summons “seeks information pertaining to approximately 200 insurance certificates of authority that DDOI issued to micro-captive insurance companies associated with Artex and Tribeca.”

Readers will recall that the routine for such petitions to enforce summons requires a rather minimal showing of need, called the Powell factors (United States v. Powell, 379 U.S. 48, 57-58 (1964)) as stated by the Court:

(1)  “that the investigation will be conducted pursuant to a legitimate purpose”; (2) “that the inquiry may be relevant to the purpose”; (3) “that the information sought is not already within the [IRS’] possession”; and (4) “that the administrative steps required by the Code have been followed.”

The Government handily met that Powell showing and DDOI failed to rebut it (as is usually the case for persons opposing IRS summonses).

The material dispute the Court resolved related to so-called reverse pre-emption.  The State insurance code provided secrecy protections to micro-captive insurance companies submitting documents and information to the DDOI.  Normally, the federal law permitting IRS summonses would pre-empt such a state law.  However, the McCarran-Ferguson Act (“MFA”) permits state statutes to trump federal law in certain circumstances.  The MFA reserves to the states the “regulation and taxation by the several States of the business of insurance.”  The statute, 15 U.S.C. §§ 1012(b), provides that

 (b) Federal regulation
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, [t]hat . . . the Sherman Act, . . . the Clayton Act[] and . . . the Federal Trade Commission Act . . . shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

The Court says (cleaned up):