(It is here that I must point out that not all, or even most, 831(b) captive insurance companies are invalid, but largely only those which had dubious coverages, ridiculous premiums, and participated in low-risk risk pools, which is still a lot of them - well into the thousands). This is the tax shelter du jour, being aggressively marketed to take advantage of the demise of abusive 831(b) captive insurance companies that were likewise marketed as tax shelters. Which brings me to the latest wave of these shelters, which all seem to be based in Puerto Rico. The Puerto Rico Captive Tax Shelter Jay Adkisson At best, it is a shelter at worst, criminal tax fraud. There have been other nearly-identical deals, but by now you should get the point: Arrangements whereby a business takes a deduction for payments to somebody else's insurance company and the money circulates back to the business owner is not a new shelter, and once the IRS finds out about it, the business owners will see their deductions denied and penalties imposed - and the promoters have a very good chance of being indicted. This didn't save the principals of Foster Dunhill, or their clients. If you think that a thick opinion letter will protect you, then you'd better consider that in the Foster Dunhill shelter, they had several opinion letters, including from the belated very large tax firm of Jenkins & Gilchrist. Oh, and the business owner participants in this deal got slammed with severe penalties too. Donaldson and Crithfield will be spending this and several future Christmas holidays with their new friends at the U.S. After the IRS figured out this scheme, the DOJ indicted Donaldson and his sidekick, Duane Crithfield you can read all about it in my article Foster and Dunhill Scheme Ends In Denial Of Deductions And Indictments For Bogus Insurance Tax Shelter. Fidelity Insurance Company internally segregated the premiums received from each business, and later funneled them into so-called "private placement life insurance" (PPLI) policies for the benefit of the business owners, who could then borrow against the cash-value of those policies, ostensibly tax-free. As with Caduceus Life, business owners caused their business to make large premium payments to Fidelity Insurance for vague "business protection policies" and took a corresponding deduction. The Foster Dunhill shelter was run by Stephen Donaldson, who controlled Fidelity Insurance Company. Suffice it to say that all the business owner participants in the deal got slammed with steep penalties.īut the DOJ wasn't even through with the Caduceus Life prosecutions before a nearly identical tax shelter started, known the Foster Dunhill shelter after the company which prolifically marketed the shelter.
Sadly, the night before he was supposed to report for prison, Peggs and his wife committed suicide. You can read more about this shelter in the later Department of Justice press release. When the IRS figured out this scheme, Peggs and bunch of other folks were indicted, and several spent time in federal prison. The businesses got a nice deduction, and the money was later recirculated back to the business owners. Virgin Islands, and sold vague "loss of income" policies to U.S. The first scam (at least that I have ever heard of) was Caduceus Life Insurance Company (later renamed "Security Trust Insurance Company"), which was run by a promoter by the name of Peter J. The premium moneys build up in the account over a period of years, and then the premiums come back to the business owner by some backdoor method. The promoter will then internally segregate the premiums that are earned from that particular business, so that each set of premiums that are earned from each business are attributed to the particular business owner client. The business owner client of the promoter will cause his business to make an oversized insurance premium payment to the promoter's insurance company, and the business will take a large deduction for that insurance expense. One such tax shelter involves an insurance company, usually offshore.