Insurance Company Seeks Redetermination of Deficiency

DEVAK RISK MANAGEMENT, INC.
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

UNITED STATES TAX COURT

PETITION

Petitioner hereby petitions for a redetermination of the deficiencies set forth by the Commissioner of Internal Revenue in his Notice of Deficiency dated September 15, 2021, and as a basis for its case, Petitioner alleges as follows:

1. Petitioner is a C corporation with a mailing address of 1155 W 440 N, Salt Lake City, Utah 84116, with legal residence and principal place of business in Utah.

2. The tax return for the period here involved was timely filed with the Office of the Internal Revenue Service at its Ogden, Utah Service Center.

3. Petitioner received the Notice of Deficiency, dated September 15, 2021, for taxable year 2018 (“year at issue”) from the office of the Internal Revenue Service at Nashville, Tennessee. Attached as Exhibit A is a copy of the Notice of Deficiency with redactions as required by the Court's rules.

4. The deficiency as determined by the Commissioner is in income tax and penalties under I.R.C. § 6662, in the following amounts, all of which are in dispute:

Year	Tax Deficiency	I.R.C. §6662 Penalty
2018	$195,915.00	$39,183.00

5. The determinations set forth in the Notice of Deficiency are based upon the following errors:

A. Respondent erred in adjusting Other Income in the amount of $932,927 for 2018.

i. Respondent erred in determining that Petitioner was not an insurance company for purposes of Section 831(b).

ii. Respondent erred in determining that Petitioner was not eligible for tax treatment under Section 831(b).

iii. Respondent erred in determining that amounts reported as premium income are includible in gross income.

iv. Alternatively, if the transactions lack economic substance, Respondent erred by including the premiums as Other Income because a transaction that lacks economic substance is not recognized for federal tax purposes.

B. Respondent erred in determining that the underpayments, if any, due from Petitioner, are subject to the imposition of I.R.C. § 6662 penalties.

6. The facts upon which Petitioner relies as the basis for Petitioner's case, are as follows:

A. Petitioner was incorporated as a C corporation on December 8, 2016, to engage in the business of providing property and casualty insurance under the laws of the State of Utah.

B. All steps taken in entering the insurance business and reinsurance transactions were entered into in furtherance of Petitioner's business purpose of operating an insurance company.

C. Petitioner was incorporated and subsequently operated as an insurance company, and as such, all premium payments received from its insureds pursuant to insurance contracts, constituted insurance premiums received in furtherance of Petitioner's operations as an insurance company.

D. For the tax year at issue, Petitioner operated as an insurance company, issuing insurance contracts in exchange for premiums.

E. The Utah Department of Insurance approved Petitioner as an insurance company on December 14, 2016, and has thereafter regulated Petitioner as such.

F. Petitioner has been adequately capitalized under Utah law since being approved as an insurance company by the Utah Department of Insurance.

G. Petitioner provided insurance coverage for certain property and casualty risks of insured entities.

H. Petitioner relied solely on an independent licensed actuary in calculating the appropriate premiums for each insurance policy issued by the Petitioner.

I. Petitioner relied solely on an independent licensed actuary to review Petitioner's reserves for unpaid losses and loss adjustment expenses, to confirm that those reserves complied with Utah law and best insurance practices.

J. Each insurance policy issued by the Petitioner identified the insured entities, contained an effective policy period, detailed the policy coverage, stated the premium amount, was timely issued, and was approved and authorized by a representative of the Petitioner.

K. Petitioner timely received all premiums under the insurance contracts.

L. Pursuant to the insurance contracts entered into by Petitioner, upon Petitioner's receipt of premiums paid by the insured entities, Petitioner became contractually obligated to bear the risk of loss related to the insured events outlined by the terms of each insurance contract, effectively shifting the risk of loss from the insured entities to Petitioner.

M. In the tax year at issue, Petitioner adequately distributed risk through Patriotic RE Insurance Company, Inc. (“Patriotic”), which is a bona fide insurance company because:

i. Patriotic was created for legitimate nontax business reasons;

ii. A circular flow of funds does not exist between Patriotic and Petitioner;

iii. Patriotic faced actual and insurable risk;

iv. The policies are arms' length contracts;

v. Patriotic charged actuarially determined premiums;

vi. Comparable coverages were more expensive or unavailable on the commercial market;

vii. Patriotic was subject to Utah Department of Insurance regulatory control, and fully complied with all regulatory requirements;

viii. Since its formation, Patriotic has been adequately capitalized; and

ix. Patriotic paid claims from a separately maintained account.

N. Petitioner achieved adequate risk distribution pursuant to the controlling legal authority through receiving premiums in exchange for insuring the insurable risks of loss of a sufficient number of unrelated entities engaged in various industries over various geographic regions around the United States.

O. Petitioner was incorporated in 2016, and has since operated as an insurance company, remaining compliant at all times with both I.R.C. § 831(b) and Utah state law.

P. With its 2016 Form 1120-PC, Petitioner affirmatively elected to be taxed using the alternative tax for small insurance companies pursuant to I.R.C. § 831(b).

Q. Petitioner's business during the tax year at issue was the issuing of insurance contracts and reinsuring of insurable risks underwritten by another insurance company.

R. For the 2018 tax year, neither Petitioner's net written premiums nor its direct written premiums exceeded $2,200,000.

S. Petitioner made no related party loans or distributions to its shareholders because it intended to build reserves to pay future claims.

T. Petitioner received one claim which was adjudicated through an established claims process, with the claim being accepted and paid.

U. Petitioner relied solely on independent professional service providers for all positions taken on the income tax return for the tax year at issue.

V. Petitioner was not negligent and did not disregard I.R.C. rules or treasury regulations.

W. Petitioner had substantial authority for the positions taken on its tax return.

X. Petitioner had reasonable cause for any underpayments on its tax return, and it acted in good faith with respect to any such underpayments.

Y. Respondent has not shown that supervisory approval was obtained as required by I.R.C. § 6751(b) for the penalties under I.R.C. § 6662.

Z. Petitioner has maintained all records related to all income excluded from its return for the tax year at issue, and has cooperated with all reasonable requests by Respondent for information regarding the income at issue.

AA. The information provided by Petitioner to Respondent constitutes credible evidence as to all factual issues relevant to ascertaining the liability of Petitioner related to its taxable income on its tax return for the year at issue.

7. Petitioner asserts that it may be entitled to additional deductions, credits, or other adjustments that were not claimed or allowed on its original filed tax return for the year at issue.

WHEREFORE, Petitioner prays that this Court may try this case and find that there are no deficiencies in income tax, no additions to tax, and no penalties due and owing from Petitioner for the year at issue.

Respectfully submitted

December 9, 2021

JEFFREY A. DAXE
Tax Court Bar No. DJ1154
Moore Ingram Johnson & Steele, LLP
326 Roswell Street, Suite 100
Marietta, GA 30060
(770) 429-1499
jad@mijs.com
Counsel for Petitioner

KENNETH D. HALL
Tax Court Bar No. HK0216
Moore Ingram Johnson & Steele, LLP
326 Roswell Street, Suite 100
Marietta, GA 30060
(770) 429-1499
kdhall@mijs.com
Counsel for Petitioner