Fifth Circuit Holds for IRS in Swift Captive Insurance Case

On July 16, 2025, the Fifth Circuit Court of Appeals affirmed the decision of the Tax Court in Swift v. Commissioner, No. 24-60270, another in the series of cases involving captive insurance companies opting to be taxed under section 831(b) of the Internal Revenue Code of 1986, as amended (the "Code"). As we have previously discussed this case in some detail, we limit the discussion to the main points that the Fifth Circuit addressed. The case considered the insurance characterization of two captives that were formed in the Federation of Saint Christopher and Nevis to write medical malpractice insurance and coverage for terrorism risk. Each captive was owned by a trust benefiting one of the Swifts' two children and Dr. Swift and his wife were the trustees.

On the issue of risk distribution the Swifts argued first that the requirement of risk distribution was met by either or both of two means: (a) tail medical malpractice policies that were issued by the captives covering 199 doctors in a practice that Dr. Swift owned, and/or (b) by a pool in which the two captives participated. On the first argument the Tax Court had decided that 199 doctors were not enough to constitute adequate risk distribution notwithstanding testimony on behalf of the Swifts that the appropriate risk units to consider should be patient visits. The Fifth Circuit concluded the Tax Court did not err when it decided that the risk units to be considered were the number of doctors, not patient visits. This conclusion by the courts is of importance to other medical malpractice captives that may be taking the position that patient visits are the appropriate risk units to analyze risk distribution, and this is another example of the adverse effects that may arise from litigation by captives formed under section 831(b) of the Code. 

On the issue of the pooling arrangement the Fifth Circuit agreed with the Tax Court's holdings that (a) the pooling agreement looked like a circular flow of funds, (b) the captives did not enter into an arm's-length contract with the pools for reinsurance coverage, and (c) the taxpayers failed to show how the premiums were determined on an arm's-length basis. Accordingly the Tax Court decision was affirmed on this issue.

In addition, in the appeal the Swifts challenged the 20 percent penalties for negligence or substantial understatement under section 6662 of the Code, which had been asserted by the Internal Revenue Service and upheld by the Tax Court. The penalties were similarly affirmed by the Fifth Circuit.

This article was edited to conform to the Chicago Manual of Style.