Judge Patrick J (“Scholar Pat”) Urda weighs up both the venial and mortal sins of Bernard T. Swift, Jr. and Kathy L. Swift, T. C. Memo. 2024-13, filed 2/1/24, their microcaptive insurers, and the reinsurance pools into which same was plunged, and finds same did not operate an insurance business as commonly understood. Rather, the whole thing was a roundy-round untaxed cash stash, courtesy of Section 831(b).

To get the tax shield, the microcaptive has to have less than $1.2 million annual premium (hence micro) and, though owned by the ownership of the captor, must diversify its risk so as to satisfy the age-old principle that “by said mischaunce shall no man be undone, but that the losse fall lightlie upon manye, and not heavily upon fewe,” as the Act of Queen Elizabeth the First (1601) put it.

BT (that’s Doc BT) owned a string of urgent care walk-in clinics, of the “usual litany of sprained ankles, sore throats, runny noses, eye injuries, and whatnot” variety. T. C. Memo. 2024-13, at p. 3. Many doctors passed through the system, but tort-reforming Texas kept malpractice recoveries low. So Doc BT had a lot of taxable cash, and rising commercial malpractice premiums. So he did the cruise-destination number, setting up offshore microcaptives (in the BVI) electing onshore Section 953 tax treatment, with supposed pool reinsurers staying in friendly offshore islands (St. Kitts), and writing exotic policies, purportedly to spread the risks.

There’s fifty (count ’em, fifty) pages of deconstruction, but the bottom line is no one not terminally insane would pay the premiums the reinsurers were getting, unless they were getting back better than 97% as retrocessionaire, and paying almost no losses and no taxes.

Judge Scholar Pat quotes Avrahami, Caylor Land, Szyzgy, Rent-A-Center, and hoc genus omne to hit the microcaptives and Doc BT with deficiencies and the five-and-ten 20% substantial understatement chop.