Opinion
10703-19 10704-19
04-05-2022
CFM INSURANCE, INC., et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Mark V. Holmes Judge
These cases were assigned to this division of the Court and are set for trial at a special session later in the spring. There are a large number of motions pending, some in only one of the cases and some in both.
This motion in limine affects only one of these cases-the one brought by CFM. CFM is, according to its theory of the case, a validly organized microcaptive insurer. CFM's reasoning here is the same as its reasoning in the motion of summary judgment we also dispose of today.
For the tax years at issue here, CFM argues, it received premium income that it could exclude from its taxable income under IRC § 831. For those years the exclusion amount was $1.2 million, and CFM showed considerable skill at managing its income-for 2012 it reported $1, 199, 136 in premiums received. It then received $1, 199, 136 in tax year 2013; and then exactly the same amount in tax year 2014 and in tax year 2015.
Congress has tinkered with this section quite a bit since 2015. Our citations are to the Code language in effect for the years before us.
The Commissioner thought something was fishy here, and audited CFM and its owners. The audit led to a notice of deficiency for CFM, and in that notice the Commissioner determined that CFM's income was taxable. The language of his explanation is important here, and there are two relevant passages in that notice. The first is on his "Income Tax Examination Changes," and it says there is only one adjustment to income:
Sch. A - section 832 premium earned 1, 199, 136.00 It makes this adjustment for each of the years at issue.
The second key passage is in the form titled "Examination of Items," and it explains the adjustment at greater length:
The transactions that were reported as premium income are not insurance transactions with[in] the meaning of federal tax law. You were not an insurance company for purposes of section 831(b). You were not eligible for tax treatment under section 831(b). The amounts that you were entitled to, and/or received, under a purported captive insurance program are includible in your gross income under section 61.
During discovery, CFM won an admission from the Commissioner that it had never had its election under § 831(b)(2)(A)(ii) revoked, invalidated, or otherwise terminated. CFM wants to leverage this admission into an implicit concession by the Commissioner of the entire case. If it turns out that trial shows CFM was an insurance company, and its section 831(b) election and the amount of its premium income aren't challenged, then it wins. And if it turns out that trial shows that CFM was not an insurance company, then the notice of deficiency's determination that the "premiums" that CFM received were taxable insurance premiums under section 832 cannot possibly be right, and it would win.
Either way, says CFM, we win-at worst the annual payments of just slightly under $1.2 million would be nontaxable contributions to capital. See Chapman Glen Ltd. v. Commissioner, 140 T.C. 294, 349 (2013).
The Commissioner contends that this is a bit too cute. He urges us to focus instead on the second passage we blockquoted above, especially the last sentence in which the Commissioner determined that the amounts that CFM received "are includible in your gross income under section 61."
At this stage of the litigation, the Commissioner has the better of the argument. The notice of deficiency's invocation of section 61 means that the determination at issue-the determination to which there has attached a presumption of correctness-is that what CFM calls "premium" income might not turn out to be premium income at all, but is still taxable as an accession to CFM's wealth from whatever source derived. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).
It may well be that CFM proves at trial that these receipts were mere capital contributions or some other form of nontaxable accession to wealth. It would also not be surprising if the learned counsel for either party quizzed CFM's officers and owners about the nature of this income to easily rebut through testimonial evidence that this accession to wealth was not rent, royalties, or anything else. But for now, it is
ORDERED that petitioner's February 15, 2022 motion in limine is denied.