Make Sure Your Captive is for Insurance Reasons not Tax Reasons
A recent Tax Court case provides a guideline to prevent penalties
The United States Tax Court this week released the Sunil S. Patel and Laurie McAnally Patel, et al. v. Commissioner of Internal Revenue, 165 T.C. No. 10 (2025) case.
The case involved a Captive insurance company that was utilized by Dr. Patel in his eye surgery business. The Captive was formed in 2011 and premiums of $1,145,000 were charged to his business holdings.
A Captive is allowed to earn up to $1.2 million of tax-free premiums during that first year of business. Dr. Patel was not really interested in providing insurance for his businesses, but rather creating tax-free wealth via the creation of the Captive.
Dr. Patel then doubled down and formed a second Captive to further enhance his tax-free income.
The Tax Court ultimately found in favor of the IRS on all charges and here are the key reasons:
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