Last Updated February 2025
Micro Captive insurance arrangements structured under IRC § 831(b) have gained attention in recent years as business owners look for ways to manage emerging risks not typically covered by commercial carriers. Alongside this growth, the IRS and U.S. courts have continued to evaluate how these structures are formed, operated, and documented.
Below is an overview of the key court cases, dates, trends, and takeaways that help illustrate how the landscape is evolving. This information is educational only and should not be interpreted as legal or tax advice.
Key Court Cases That Continue to Shape 831(b) Compliance
Avrahami v. Commissioner (2017)
One of the earliest and most referenced micro captive cases, Avrahami highlighted several concerns the court deemed problematic, including:
- Premiums significantly higher than comparable commercial coverage
- Unclear and contradictory policy language
- A pooling arrangement that did not distribute risk adequately
- Claims not paid until after an IRS audit
- Loans from the captive back to related parties
This case helped define what courts consider “insurance in the commonly accepted sense.”
Caylor Land & Development, Inc. v. Commissioner (2021)
This case reaffirmed earlier concerns seen in microcaptive litigation, including premiums aligned with tax thresholds and inadequate risk distribution. Courts also highlighted operational irregularities and the importance of actuarially supported pricing.
Syzygy Insurance v. Commissioner (2019)
This decision expanded on the importance of arm’s‑length practices. Findings included:
- Circular flow of funds
- Questionable actuarial methodology
- Policies issued after coverage periods ended
- Lack of claims submission despite known losses
- Investments inconsistent with an insurance company’s obligations
The court also clarified what “actuarially determined premiums” should involve.
Reserve Mechanical Corp. v. Commissioner (2018; affirmed May 2022)
The case focused on an “illusory” risk pool and found that the captive did not distribute risk. The appellate court affirmed in 2022, reinforcing its significance. Abuses included:
- Arrangement by PoolRe was illusory
- Coinsurance agreement “Wholly unreasonable”
- Did not pay claims
- Lacked Investigation or supporting documentation
Puglisi Egg Farms v. Commissioner (IRS Concession, 2021)
One of the most notable outcomes in the industry—not because the court ruled for the taxpayer, but because the IRS conceded the case, avoiding a taxpayer‑friendly precedent.
SRA weighed in on this case in a Letter from The CEO found here.
Recent Wave of Cases (2024–2025): Reinforcing Familiar Themes
The last two years have seen a surge of new cases, but the themes remain consistent.
Keating v. Commissioner (January 2024)
The taxpayers, shareholders of Risk Management Strategies, Inc. (RMS), established Risk Retention, Ltd. (RR), a captive insurer domiciled in Anguilla. The court determined that RR did not operate as a bona fide insurance company. Issues included retroactive policy issuance, premiums set to maximize tax benefits, and improper claims handling.
Patel v. Commissioner (November 2025)
Drs. Patel and McAnally-Patel, owners of an eye surgery center and research facilities, established two captives: Magellan Insurance Company in St. Kitts and Plymouth Insurance Company in Tennessee. The court concluded that these captives failed to distribute risk adequately and did not function as legitimate insurance entities. Premiums were deemed unreasonable, and the captives lacked proper actuarial analysis and claims history.
Royalty Management Insurance Co. v. Commissioner (September 2024)
The court ruled against Royalty Management Insurance Co., a micro-captive insurer, finding that it did not operate as a bona fide insurance company. Issues included circular cash flows, lack of actuarial input in setting premiums, and absence of claims payments. The court emphasized the importance of genuine risk transfer and distribution in qualifying as insurance for tax purposes
Common Themes Across Court Decisions
Although each case is fact‑specific, several recurring patterns appear:
1. Premiums must be grounded in credible actuarial analysis. Courts consistently scrutinize whether pricing reflects genuine risk—not statutory limits.
2. Risk distribution must be meaningful. Participating in a pool alone is not enough; the pool must transfer real, unrelated risk.
3. Policies and claims must mirror standard insurance practices. Late policies, informal claims handling, and undocumented settlements raise red flags.
4. Captives must operate as true insurance companies. This includes capitalization, documentation, governance, reporting, and investment practices.
5. Economic substance matters. Courts look closely at the business purpose and real‑world function of the captive.
Divergent Outcomes: 2025’s Two Most Important Micro Captive Decisions
Although many recent cases have reinforced prior outcomes, 2025 delivered two decisions with dramatically different reasoning — despite both resulting in IRS wins. Together, they offer the clearest picture yet of how courts view 831(b) captives.
1. Swift v. Commissioner – Fifth Circuit Court of Appeals (July 2025)
Dr. Bernard Swift, owner of Texas MedClinic, formed two micro-captive insurers, Castlerock and Stonegate, domiciled in St. Kitts. The court found that these captives failed to meet the criteria of insurance in the commonly accepted sense and lacked sufficient risk distribution. Notably, the captives participated in reinsurance pools with circular fund flows and had premiums set without actuarial support.
Key Points:
- IRS win upheld — deductions denied and penalties applied
- Court found failed risk distribution, holding that patient visits ≠ independent third‑party exposures
- Court found failed risk distribution, holding that patient visits ≠ independent third‑party exposures
Implication: Even well‑structured captives may fail if their exposure base does not meet the appellate court’s standard for unrelated risk.
2. CFM Insurance, Inc. v. Commissioner – U.S. Tax Court (August 2025)
Trial‑level decision — persuasive but not binding outside the case
Key Points:
- First case where the Tax Court accepted that a captive met risk distribution and actuarially reasonable premiums
- Still an IRS win due to operational failures:
- Late policy issuance
- Informal claims processes
- Off‑schedule premium payments
- Shows the Tax Court may recognize well‑run, well‑documented captives as legitimate
Implication: Tax Court may be open to taxpayer wins—if operational compliance is strong.
Key Lesson From These Conflicting Outcomes
Even when courts reach different conclusions or use different reasoning:
Risk Distribution + Operational Compliance = Critical
A captive can have strong actuarial support and still fail if it lacks day‑to‑day insurance discipline…
or it can have robust operations but still fail if it cannot demonstrate genuine unrelated risk.
Both pillars matter.
Businesses exploring micro captives should understand these themes and seek guidance from experienced advisors—particularly given how consistently the IRS has prevailed in litigation during 2024–2025.