Tax Court Imposes Penalties in Jones Micro-Captive Case

The US Tax Court has imposed accuracy-related penalties in the Jones v. Commissioner litigation, finding that a captive insurance transaction involving Sani-Tech West, Inc. (STW) and Clear Sky Insurance Co., Inc. (CSI) lacked economic substance.

The September 29, 2026, memorandum opinion addresses penalty issues remaining after the court's earlier decisions in Jones v. Commissioner, T.C. Memo. 2025–25, and T.C. Memo. 2025–78. Those decisions resolved the underlying tax issues, including the court's determination that CSI did not provide insurance to STW for federal income tax purposes through a legitimate captive insurance program.

For 2015, the court found that the disputed captive transaction lacked economic substance under Internal Revenue Code Section 7701(o). The court concluded that the transaction did not meaningfully change the petitioners' economic position and that the petitioners failed to establish a substantial purpose for the transaction apart from its federal income tax effects.

The court sustained 40 percent accuracy-related penalties against the petitioners other than CSI for 2015. The penalty for a transaction lacking economic substance is generally 20 percent but increases to 40 percent when the transaction is not adequately disclosed. The court found that the applicable returns did not sufficiently disclose the captive transaction. CSI is subject to the unenhanced 20 percent penalty following a concession by the Internal Revenue Service.

For 2016, the court separately addressed a $400,000 payment from CSI to Richard Shor that it previously determined was a constructive dividend rather than a bona fide loan. The court held that the Shors were liable for a 20 percent accuracy-related penalty based on negligence or disregard of rules or regulations.

The Tax Court said the latest opinion does not change its earlier conclusions that CSI did not engage in a legitimate insurance arrangement and that the premiums at issue were not negotiated at arm's length.