Syzygy Insurance Co., Inc. v. Commissioner
2019 T.C. Memo. 34
| Tax Ct. | 2019Background
- Syzygy Insurance Co., a Delaware microcaptive formed and managed through Alta, received reinsured premiums from fronting carriers for risks ceded from Highland Tank & Affiliates (HT&A); Syzygy made a §831(b) election and reported no taxable premium income for 2009–2011.
- HT&A (a family group of S corporations) purchased several ‘‘captive program’’ policies through fronting carriers (U.S. Risk, then Newport Re); fronting carriers ceded ~100% of net premiums to Syzygy after charging small fronting fees.
- Alta allocated 49% of premiums to layer 1 (0–$250k) and 51% to layer 2 ($250k–$1M); independent actuarial reviewer (Taylor‑Walker) advised the split was unlikely, but Alta kept the 49/51 allocation.
- Premiums and policy terms showed atypical features: high rate‑on‑line for captive policies versus HT&A’s commercial policies, short claims‑reporting windows, late issuance of policies, ambiguous coverage terms, lack of claims submission by HT&A, and Syzygy holding split‑dollar life policies it could not access.
- Commissioner disallowed HT&A’s premium deductions, determined Syzygy was not an insurance company (invalidating the §831(b) election), taxed Syzygy on premiums, and assessed §6662 accuracy‑related penalties; Tax Court found arrangement lacked risk distribution and was not insurance but waived penalties due to reasonable reliance on professional advice.
Issues
| Issue | Petitioners' Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Whether payments were deductible insurance premiums (sec. 162) | Payments to Syzygy/fronting carriers were bona fide insurance premiums and deductible | Payments were not for insurance and therefore not deductible | Not deductible — arrangement was not insurance |
| Whether Syzygy’s §831(b) election valid | Syzygy was an insurance company so §831(b) election excluded premiums from income | Syzygy did not transact in insurance; §831(b) election invalid | §831(b) election invalid; premiums taxable to Syzygy |
| Whether premiums should be recharacterized / included in Syzygy’s income if not insurance | (Petitioners) payments could be treated consistent with revenue rulings allowing alternate characterizations | Commissioner treated amounts as taxable income to Syzygy | Court declined to recharacterize; sustained Commissioner’s determination that premiums are Syzygy income |
| Whether petitioners liable for §6662 accuracy‑related penalties | Petitioners relied in good faith on competent advisor (DiNatale) and therefore had reasonable cause | Understatements and negligence warranted penalties | Penalties abated — reasonable cause and good faith reliance on professional advice established |
Key Cases Cited
- Avrahami v. Commissioner, 149 T.C. 144 (Tax Ct. 2017) (framework for evaluating captive arrangements and bona fides of fronting carriers)
- Rent‑A‑Center, Inc. v. Commissioner, 142 T.C. 1 (Tax Ct. 2014) (factors for risk distribution and insurance determination)
- AMERCO & Subs. v. Commissioner, 96 T.C. 18 (Tax Ct. 1991) (four‑part insurance test)
- Harper Group v. Commissioner, 96 T.C. 45 (Tax Ct. 1991) (insurance criteria and related‑party scrutiny)
- R.V.I. Guaranty Co. & Subs. v. Commissioner, 145 T.C. 209 (Tax Ct. 2015) (factors for whether arrangement is insurance in commonly accepted sense)
- Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43 (Tax Ct. 2000) (reasonable‑cause reliance on professional advice elements)
- Welch v. Helvering, 290 U.S. 111 (U.S. 1933) (taxpayer bears burden to prove entitlement to deductions)