Category Archives: criminal tax law

The IRS’s long‑running battle with Florida taxpayer Burt Kroner shows how far the government will go to reach assets held in offshore trusts when a large tax bill goes unpaid. In United States v. Kroner et al., 9:25‑cv‑80877 (S.D. Fla., West Palm Beach), the government sued Kroner, family members, and a Bahamian trustee to repatriate foreign trust assets and satisfy a tax liability topping $27–28 million.

The backstory: cash transfers and Bahamian trusts

The Kroner dispute traces back to cash transfers Kroner received from a former British business associate between 2005 and 2007. According to court filings, he received about $25 million in cash, took the position that the transfers were not taxable, and then moved substantial amounts into Bahamian trusts.

Two structures are central to the current enforcement case:

• The Kroner Family Trust 2004, funded with roughly $12.675 million via a series of transfers from 2005–2006.
• The Kroner Family 2007 Trust (often referenced as a separate settlement), funded with another $5 million in 2007.

By 2012, the IRS had assessed approximately $13 million in tax, penalties, and interest related to the transfers, and litigation ensued over deficiency and penalties, including the Eleventh Circuit’s decision in Kroner v. Commissioner on section 6751(b) supervisory approval. While the procedural penalty fight was significant, it did not eliminate the underlying income tax, and the government alleges that, over nearly two decades, Kroner’s unpaid balance has ballooned to around $27–28 million with additions and interest.

The enforcement suit: repatriation and injunctive relief

On July 10, 2025, the United States filed a civil action in the Southern District of Florida, United States v. Kroner et al., seeking to collect the assessed liabilities and reach assets held in the Bahamian trusts. 

The complaint names as defendants:offshorealert+3

• Burt Kroner
• Family members Alyson (Allyson) and William Kroner
• Equity Trust Bahamas Ltd. as trustee of the 2004 and 2007 Bahamian trusts.dockets.justia+2

The government’s theory is straightforward: although the assets sit in foreign trusts under Bahamian law, Mr. Kroner and his family benefit from them and have sufficient control or influence that a U.S. court can order them to take steps to bring assets back to the United States. 

• Enforcement of federal tax liens arising from the assessments.
• Injunctive relief restricting transfers from the Bahamian trusts.
• A repatriation order compelling Kroner to cause sufficient trust assets to be brought into the U.S. to satisfy the IRS’s claim.

Notably, this collection case follows a bankruptcy proceeding in which a Florida bankruptcy court ruled that the Bahamian trusts and their assets were not subject to the automatic stay, clearing the way for separate district court enforcement.

Bahamian law vs. U.S. collection power

A major flashpoint is whether Bahamian law can insulate the trusts from U.S. collection efforts. Kroner’s side has pointed to foreign law constraints and argued that the IRS compromised any secured lien position by filing an unsecured proof of claim in bankruptcy, attempting to undermine the government’s lien‑enforcement posture.

DOJ’s response is that foreign law cannot be used as a shield when a U.S. court has personal jurisdiction over the taxpayer. In March 2026 filings, the government argued that:

• The court can order a U.S. taxpayer–beneficiary to exercise whatever rights and powers he has over foreign trust structures to repatriate assets.
• Personal jurisdiction over the settlor/beneficiary is enough to support repatriation and injunctive relief, even though the court cannot directly command the foreign trustee

This line of argument echoes earlier repatriation and contempt cases, where courts have jailed taxpayers who refused to bring back offshore assets despite having the ability—at least on paper—to direct trustees or otherwise access the funds.

Injunctions, freezes, and a settlement

Early 2026 saw key motion practice over how tightly the Bahamian trusts would be restricted while the case was pending. On one hand, DOJ moved for strong relief, including an offshore asset freeze and repatriation of funds. On the other, the defense argued for access to trust assets for living expenses and contested the scope of any freeze.

Public reports show a middle path:

• In February 2026, the court granted a preliminary injunction limiting transfers from the Bahamian trusts and partially freezing the accounts, while allowing a measured flow of funds to the family.
• DOJ later agreed to drop its broader bid for a full offshore asset freeze as part of a partial deal governing ongoing trust distributions during the litigation.

By April 2026, Bloomberg and other outlets reported that Kroner and the IRS had reached a settlement resolving the dispute over the frozen Bahamian trust funds. Filings indicate that the resolution followed the court’s injunction and negotiations over access to the foreign trust accounts, though detailed terms were not publicly disclosed.

Practical lessons for planners and taxpayers

For tax professionals and planners working with clients who have offshore trusts or are considering them, Kroner offers several practical takeaways:

• Offshore does not mean off‑limits. U.S. courts repeatedly show that they will use personal jurisdiction, the All Writs Act, and federal collection statutes to force repatriation of foreign assets when necessary to satisfy tax or other federal debts.
• Trust “control” is broader than formal titles. Even if a foreign trustee appears independent, a settlor or beneficiary with practical ability to influence distributions or trustee decisions may be treated as capable of bringing assets back, with civil contempt as the enforcement hammer.
• Bankruptcy does not solve offshore exposure. The fact that a bankruptcy court allowed the Bahamian trusts to sit outside the automatic stay did not prevent DOJ from later pursuing the assets through a targeted district court enforcement case.
• Long‑term noncompliance gets very expensive. Kroner’s alleged liability grew from an initial assessment in the low‑teen millions to roughly $27–28 million over time, illustrating how interest and penalties can compound during years of resistance and litigation.news.
• Procedure matters, but it is not everything. The earlier Eleventh Circuit opinion in Kroner v. Commissioner on section 6751(b) limited penalty exposure, yet the core income tax liability survived, and the IRS remained willing to litigate aggressively to collect.legacy.

For advisors, the message is clear: clients cannot rely on foreign trust structures or local secrecy laws to escape U.S. tax enforcement once they are under the jurisdiction of a federal court. The better path is proactive compliance, early engagement with the IRS when issues appear, and careful planning that assumes U.S. courts will look through form to substance in offshore arrangements.

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   Contact the Tax Lawyers at

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources :

   1.       https://dockets.justia.com/docket/florida/flsdce/9:2025cv80877/693294       

2.      https://www.law360.com/cases/68704c94365c8adb5e1824a0/articles      

3.      https://www.law360.com/tax-authority/articles/2456426/bahamian-law-can-t-shield-trusts-in-28m-tax-suit-doj-says       

4.      https://www.offshorealert.com/usa-v-burt-kroner-et-al-complaint-to-repatriate-assets-28m-tax-liability-bahamas-trusts/         

5.       https://dockets.justia.com/docket/florida/flsdce/9:2025cv80876/693292

6.      https://flabizlaw.org/wp-content/uploads/2026/01/BK-UCC-CLE-Materials-Wealth-Transfers-and-Fraudulent-Transfers-1.29.26.pdf 

7.       https://www.law360.com/tax-authority/articles/2439990/doj-drops-bid-for-offshore-asset-freeze-in-28m-tax-suit 

8.      https://www.law360.com/articles/2439990/doj-drops-bid-for-offshore-asset-freeze-in-28m-tax-suit 

9.      https://plannedgiving.howard.edu/?pageID=134&Cat=4&docID=1008

10.   https://descrybe.ai/case-details/c8240837

11.    https://casetext.com/case/kroner-v-commr-of-internal-revenue?p=1&q=48+F.4th+1272&sort=relevance&type=case

12.   https://www.plainsite.org/courts/florida-southern-district-court/atlantic-specialty-insurance-company-inc-v-okeefe-painter-architects-llc-et-al/366724sf2/

13.   https://www.flsd.uscourts.gov/sites/flsd/files/availablecases/21-CV-81180-RLR.pdf

14.   https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/07/ARC18_Volume1_MLI_SignificantCases.pdf

15.    https://www.justice.gov/archive/tax/usaopress/2008/txdv08_080822-01.pdf

Read more at: Tax Times blog

Hyatt’s long‑running battle with the IRS over the tax treatment of its hotel rewards program fund just took a major turn at the U.S. Court of Appeals for the Seventh Circuit. In Hyatt Hotels Corp. & Subsidiaries v. Commissioner, No. 24‑3239, the court vacated a Tax Court decision that had largely sided with the IRS and sent the case back for a do‑over on some key legal theories. For tax professionals advising brands with loyalty or rewards programs, this is a case to watch.

The core issue: who owns the loyalty fund?

Hyatt operates a centralized loyalty program funded by payments from Hyatt‑owned and franchisee hotels. These payments go into a dedicated rewards fund used to provide free or discounted hotel stays and other benefits to members. The fund also earns investment income.

Hyatt’s position has been that it does not have a beneficial interest in this fund. According to Hyatt, the money is effectively held and used for the benefit of the participating hotels and loyalty members, and it can only be used for program purposes. The IRS saw it very differently, asserting that roughly $300 million of fund balances and income should be treated as Hyatt’s taxable income, generating about $71 million in additional tax for the years at issue.

At the Tax Court, Hyatt lost that argument: the court agreed with the IRS that the fund income belonged to Hyatt and allowed the Service to pull a large cumulative amount into income via an “accounting method” adjustment. The Tax Court also rejected Hyatt’s alternative method‑of‑accounting arguments, including an attempt to use rules analogous to the trading stamp (premium) method.

What the Seventh Circuit said

The Seventh Circuit did not simply affirm or reverse on the same grounds. Instead, it took issue with how the Tax Court framed and analyzed the case.

Two aspects of the opinion deserve particular attention:

·         The claim of right doctrine

·         The trading stamp / premium method and “other property”

Claim of right: more than a failed trust

Hyatt did not rely solely on a formal trust theory. It also argued that, under the claim of right doctrine, the amounts in the fund were not currently taxable to Hyatt because its control was significantly constrained and the funds were burdened by obligations to provide future rewards.

The Tax Court focused heavily on whether Hyatt had established something like a trust or similar arrangement, concluded that Hyatt had not, and largely treated that as the end of the matter. The Seventh Circuit held that was legal error. The presence or absence of a formal trust does not substitute for a thorough claim‑of‑right analysis.

In other words, even if Hyatt technically “owns” the fund for some purposes, the Tax Court still needed to address whether, given the restrictions and obligations attached, Hyatt had income under the claim of right doctrine in the years in question. The Seventh Circuit declined to perform that fact‑intensive analysis itself and instead vacated and remanded for the Tax Court to do it properly.

Trading stamp method: are points “other property”?

Hyatt also argued that its rewards program should be accounted for using a trading stamp / premium‑type method, which essentially allows a taxpayer to recognize income currently but deduct a reasonable estimate of the future cost of redeeming points, premiums, or similar obligations.

The Tax Court rejected this on the categorical ground that the statute and regulations apply only where the stamp or premium is redeemable for “merchandise, cash, or other property,” and it read “other property” to mean tangible property. Because Hyatt’s points are redeemable for hotel stays and services, the court concluded they fell outside the regime.

The Seventh Circuit disagreed. It held that nothing in the text required “other property” to be tangible and that the Tax Court erred as a matter of law by reading in a tangibility requirement. That does not automatically hand Hyatt a win on the method question—Hyatt still must satisfy all the statutory and regulatory criteria—but it removes a key legal barrier that would have excluded many modern loyalty programs from trading stamp‑style treatment simply because they provide stays, miles, or services rather than physical goods.

Why this matters beyond Hyatt

The implications of this case extend well beyond one hotel chain. Many industries now run large‑scale loyalty programs—hotels, airlines, retailers, financial institutions—and many centralize contributions from affiliates or franchisees into a common fund.

Several themes emerging from Hyatt are likely to be important for those programs:

·         Form vs. substance of the fund
The Seventh Circuit’s criticism of the Tax Court’s “no trust, taxpayer loses” approach signals that the analysis cannot end with labels. Restrictions on use of funds, contractual obligations to affiliates, and program documents may all be relevant in deciding when and to whom income is recognized.

·         Claim of right in the loyalty context
Loyalty funds often sit on substantial “breakage” and accumulated balances that are not immediately needed to pay redemptions. Hyatt suggests that courts must confront how the claim of right doctrine applies to those amounts when they are subject to real limitations and future obligations. That could affect both inclusion timing and whether some amounts are ever income to the program operator at all.

·         Method‑of‑accounting options
By rejecting a bright‑line tangibility requirement for “other property,” the Seventh Circuit opens the door for loyalty programs that provide services (like travel or lodging) to argue for a trading stamp‑style method where the statutory conditions can be met. That could provide better matching between program revenues and redemption costs and reduce large one‑time inclusion adjustments.

What to watch on remand

The Tax Court now must revisit Hyatt with two clear instructions: actually analyze the claim of right question and reconsider trading stamp eligibility without a tangibility gloss.

On remand, key questions will include:

·         To what extent did Hyatt truly have unrestricted control over the fund versus holding it under meaningful contractual or practical constraints?

·         How do the loyalty program documents allocate rights and obligations between Hyatt and participating hotels?

·         Can Hyatt demonstrate that its rewards points and redemptions fit within the statutory and regulatory framework for trading stamp / premium accounting, now that “other property” is not confined to tangibles?

For tax advisors, this is a good moment to inventory clients’ loyalty and rewards structures, especially where there is a centralized fund, significant breakage, or complex affiliate arrangements. Program documents, funding mechanics, and financial statement treatment will all be relevant if the IRS challenges the income characterization or method of accounting.

 Have an IRS Tax Problem?

   Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2026%2FD04-22%2FC%3A24-3239%3AJ%3AKirsch%3Aaut%3AT%3AfnOp%3AN%3A3527915%3AS%3A0             

2.      https://www.currentfederaltaxdevelopments.com/blog/2026/4/22/treatment-of-loyalty-rewards-program-funds-and-the-claim-of-right-doctrine              

3.      https://www.law360.com/tax-authority/articles/2468683/7th-circ-revives-300m-hyatt-rewards-tax-dispute                 

4.      https://news.bloombergtax.com/financial-accounting/hyatts-71-million-tax-assessment-bounced-back-to-tax-court            

5.       https://dockets.justia.com/docket/circuit-courts/ca7/24-3239

6.      https://casetext.com/case/hyatt-hotels-corp-subsidiaries-v-commr-of-internal-revenue

7.       https://www.millercanfield.com/resources-Tax-Court-Rules-on-Hotel-Rewards-Program.html            

8.      https://www.casemine.com/judgement/us/651cea4b579e261d14c73bd3/amp      

9.      https://www.courthousenews.com/hyatt-fights-tax-on-loyalty-program-fund-at-seventh-circuit/

10.   https://www.casemine.com/judgement/us/5914c333add7b049347c4aa4

11.    https://x.com/tax/status/1968072565915546042

12.   https://www.scconline.com/blog/post/2025/07/29/sc-ruling-on-hyatts-liability-to-pay-tax-in-india/

13.   https://news.bloombergtax.com/daily-tax-report/hyatt-meets-friendly-court-in-irs-lawsuit-over-rewards-program

14.   https://www.law360.com/articles/2388455

15.    https://courthousenews.com/wp-content/uploads/2025/09/appellants-irs-v-hyatt.pdf

16.   https://www.law360.com/tax-authority/articles/2468683/7th-circ-revives-300m-hyatt-rewards-tax-dispute                

17.    https://news.bloombergtax.com/financial-accounting/hyatts-71-million-tax-assessment-bounced-back-to-tax-court       

18.   https://media.ca7.uscourts.gov/cgi-bin/OpinionsWeb/processWebInputExternal.pl?Submit=Display&Path=Y2026%2FD04-22%2FC%3A24-3239%3AJ%3AKirsch%3Aaut%3AT%3AfnOp%3AN%3A3527915%3AS%3A0           

19.   https://www.casemine.com/judgement/us/651cea4b579e261d14c73bd3/amp    

20.  https://www.currentfederaltaxdevelopments.com/blog/2026/4/22/treatment-of-loyalty-rewards-program-funds-and-the-claim-of-right-doctrine               

21.   https://www.millercanfield.com/resources-Tax-Court-Rules-on-Hotel-Rewards-Program.html              

22.    

Read more at: Tax Times blog

In Liberty Global Inc. v. United States, the Tenth Circuit didn’t just apply the economic substance doctrine to a sophisticated cross-border structure—it walked straight through a check-the-box election that the taxpayer tried to treat as sacrosanct. The case is a shot across the bow for taxpayers relying on classification elections to manufacture earnings and profits (E&P) and access the section 245A deduction without corresponding economic change or substance.

This post unpacks how the check-the-box regulations featured in “Project Soy,” what Liberty Global argued, how the courts responded, and what that means for planning going forward.

The role of check-the-box in Project Soy

Liberty Global’s “Project Soy” was a multi-step internal restructuring designed to create artificial E&P and a deemed dividend to support a section 245A deduction and an associated refund claim. At the heart of that design was an entity classification change under the check-the-box regulations.

• One of the key steps in Project Soy was a check-the-box election that changed the tax classification of a foreign affiliate.
• That election triggered deemed transactions that, as modeled, generated the E&P needed to support a large section 245A dividends received deduction.
• In effect, the classification change was the mechanism used to turn internal group movements and latent attributes into the “dividend” Liberty Global wanted to treat as eligible for the 100% DRD.

Liberty Global tried to isolate this step and characterize it as a pure tax classification election that, by design, has no non-tax legal effect and therefore should be analyzed differently—or not at all—under the economic substance doctrine.

Liberty Global’s theory: check-the-box as a safe zone

Liberty Global and supporting amici advanced a theory that will sound familiar to anyone who has used check-the-box in planning:

1. Check-the-box is “all form and no substance.”
   The regulations allow taxpayers to elect how eligible entities are classified for federal tax purposes, with the election often having no collateral legal or commercial consequence. From the taxpayer’s perspective, that means the election is pure tax “form,” yet it has always been respected when properly made.
2. Classification choices are “basic business transactions.”
   The legislative history to section 7701(o) suggests that the economic substance doctrine is not meant to police “basic business transactions” where Congress clearly allows taxpayers to choose among alternatives (debt vs. equity, corporate vs. partnership, etc.) based on tax considerations. Liberty Global tried to place check-the-box in that protected category.
3. Relevance and the “unit of analysis.”
   Liberty Global pushed a narrow view of what counts as the “transaction” for economic substance purposes. The idea was:
• The relevant “transaction” is the check-the-box election itself.
• Because that election is a permissible regulatory choice that Congress and Treasury intended to be tax-driven, section 7701(o) is not “relevant” to it.
• If the court adopts that framing, the deemed steps and resulting E&P sit behind a sort of shield: the election is respected, and the government cannot invoke economic substance to disregard the tax consequences.

In other words, the taxpayer wanted the court to treat check-the-box as a quasi–safe harbor: if the regulations authorize the election and you follow the rules, the resulting attributes should not be second-guessed under section 7701(o).

How the courts actually treated the check-the-box step

Both the district court in Colorado and the Tenth Circuit refused to treat the check-the-box election as immune from economic substance review.

No threshold carve-out for classification elections

The district court rejected the idea of a special “relevance” gate that would pre-screen certain categories of transactions—like entity classification choices—out of the doctrine. Instead, it effectively treated the statutory relevance requirement as bound up with the two-prong test:

• If a step is part of a transaction designed to generate a tax benefit, and that overall transaction fails the objective/subjective tests of section 7701(o), the doctrine is “relevant.”
• There is no separate, front-end inquiry that says, “check-the-box elections (or similar steps) are off limits to economic substance.”

That framing matters, because it prevents taxpayers from using labels like “election” or “classification” to avoid scrutiny.

The “transaction” is the integrated project, not one step

The court also rejected Liberty Global’s attempt to define the “transaction” narrowly as the check-the-box step that produced the E&P:

• It treated Project Soy as a single, integrated transaction, analyzing the steps in the aggregate rather than isolating the election.
• The fact that the check-the-box step was the one that technically generated E&P did not make it the only relevant transaction; it was one link in a deliberately designed chain.

This approach is consistent with longstanding economic substance case law: when the taxpayer orchestrates a multi-step structure to achieve a specific tax result, courts look at the plan as a whole rather than elevating one formalistic step.

No “basic business transaction” shelter for Project Soy

On the legislative history point, the courts drew a line between:

• Routine, economically grounded classification choices (e.g., choosing to operate as a corporation vs a partnership because of liability, investor expectations, or regulatory constraints, even if tax is a major factor); and
• Highly engineered, year-end structures designed primarily to manufacture tax attributes (E&P, dividends, basis, etc.) without changing real-world operations or risk.

Project Soy landed firmly in the second category. The courts were comfortable treating it as a tax shelter rather than “basic tax planning,” even though it used familiar tools like check-the-box and section 245A.

What Liberty Global signals about check-the-box going forward

Liberty Global does not say that check-the-box elections are always subject to economic substance or that entity classification elections are inherently suspect. But it sends several clear messages about how courts may view these elections in complex planning:

1. Classification is respected; manufactured attributes are not necessarily

Courts will still respect a valid election as a matter of entity status—if you elect to treat a foreign subsidiary as disregarded, the classification itself holds. The question is what happens next:

• The deemed transactions and tax attributes (E&P, basis, gain, loss) that follow from the election can be brought within the economic substance analysis if they are part of an overall scheme that lacks real economic change and non-tax purpose.
• In Project Soy, Liberty Global’s own concessions about the lack of economic substance in key steps made that an easy conclusion for the court once it looked at the transaction as a whole.

2. Check-the-box is not a per se “basic business transaction”

The case undercuts the idea that classification elections are automatically protected by the “basic business transaction” language in section 7701(o)’s legislative history:

• When a check-the-box election is used in a straightforward way to align tax treatment with business reality (for example, ignoring an entity to match a single, integrated operating business), it is more likely to fit comfortably within that carve-out.
• When the election is used as part of a layered, advisor-driven project whose main purpose is to create tax-favorable attributes (like “manufactured” E&P) and extract value without corresponding economic income, it is more likely to be swept into an economic substance challenge.

Liberty Global sits at the aggressive end of that spectrum, and that’s exactly why the court was willing to disregard the tax benefit.

3. The “unit of analysis” question just got more important

For planners, the key practical question is: what is the transaction a court will analyze under section 7701(o)?

Liberty Global suggests that:

• Courts will favor an integrated view of multi-step planning, particularly when the taxpayer has treated the steps as part of a named internal “project” with a modeled tax outcome.
• Taxpayers will have an uphill climb if they try to isolate a single check-the-box election, or similar election, and argue it should be analyzed independent of the broader structure.

This makes it more important to think about how a series of steps will look as a cohesive transaction, not just whether each element technically meets regulatory requirements in isolation.

Practical takeaways for tax planning and controversies

For practitioners using check-the-box elections in cross-border planning, Liberty Global offers several practical lessons:

1. Document real non-tax purpose where it exists.
   If a classification election is part of a genuine business restructuring—consolidating operations, streamlining regulatory footprints, integrating cash management—build that record contemporaneously. It will be critical if the structure is later framed as “Project X” in a controversy.
2. Be wary of structures that exist almost entirely on paper.
   The more the structure’s effects are confined to the tax balance sheet (E&P, basis, DRDs, timing) without operational change, the more it will look like Project Soy to a court.
3. Assume sophisticated planning can be viewed as a single “transaction.”
   If the design involves multiple affiliated entities, rapid or year-end changes in classification, circular flows, and a model focused on tax outcomes, expect a court to treat it as an integrated transaction for economic substance purposes.
4. Don’t rely on “it’s in the regs” as a shield.
   That a result technically follows from the check-the-box regulations, section 245A, or similar rules is necessary but no longer sufficient comfort in high-stakes planning. Courts are increasingly willing to apply section 7701(o) to override formal compliance where they view the result as inconsistent with anti–base erosion policy.
5. In controversy, think carefully about how you define the “transaction.”
   How you frame the transaction in protests, briefs, and expert reports matters. Liberty Global shows that trying to define the transaction too narrowly (e.g., “only the election”) risks losing credibility with courts inclined to see the bigger picture.

 Have an IRS Tax Problem?

Or

Need Experienced International Tax Planning
That Will Hold Up on Audit?

   Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

1.       https://www.currentfederaltaxdevelopments.com/blog/2026/4/21/the-tenth-circuit-codifies-the-reach-of-the-economic-substance-doctrine-over-mechanical-statutory-compliance                  

2.      https://lawcenter.nam.org/results.aspx?idGroup=6998            

3.      https://www.law360.com/articles/2468310/-liberty-global-loses-2-4b-tax-substance-fight-in-10th-circ-            

4.      https://kpmg.com/us/en/taxnewsflash/news/2026/04/tenth-circuit-taxpayer-refund-claim-denied-economic-substance-doctrine.html                     

5.       https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111421660.pdf                 

6.      https://dockets.justia.com/docket/circuit-courts/ca10/23-1410

7.       https://www.uschamber.com/cases/tax/liberty-global-v-united-states  

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9.      https://www.ntu.org/library/doclib/2024/05/NTUF-Amicus-Liberty-Global-Inc-v-United-States-AS-FILED.pdf       

10.   https://www.uschamber.com/assets/documents/U.S.-Chamber-Coalition-Amicus-Brief-Liberty-Global-v.-United-States-Tenth-Circuit.pdf        

11.    https://www.ntu.org/foundation/detail/taxpayer-defense-center-urges-narrow-application-of-economic-substance-doctrine-in-liberty-global-inc-v-united-states    

12.   https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=i61AZmKfS9NEPCmYrJB%2BqqKGkK4vCBGD105GH%2BmKOOPUy63b0oyseKNxr5G%2FYB3RsJtcW36ifl%2FrJMTQ9Dev7VJJqt1c8PE%3D&nav=MOVTOne7ajY5Vm7jUGXQfKv%2F7eHL7Ou5Ph7y6lsL4f71hxeKcMczt4%2BGpOnmAgrx6HH%2BSO%2FuPtc%3D&attdocparam=J3hlk3I%2Bs4gI2UUWYgHwE6AQHygJqsTA9UPLOE6X7Kdzwm6QzU89XwdFCxXVSU9g9S7vnbmruMD66SU%3D&fromContentView=1 

13.   https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111286948.pdf

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15.    https://www.millerchevalier.com/publication/tenth-circuit-upholds-tax-court-ruling-against-liberty-global-foreign-tax-credit

16.   https://www.taxcontroversy360.com/tag/liberty-global-inc-v-united-states/      

17.    https://www.steptoe.com/en/news-publications/liberty-global-cases-raise-novel-questions-for-appeal.html               

18.   https://www.hklaw.com/en/insights/publications/2024/05/beware-liberty-global-appeal-puts-basic-tax-planning-in-jeopardy         

19.   https://www.uschamber.com/assets/documents/U.S.-Chamber-Coalition-Amicus-Brief-Liberty-Global-v.-United-States-Tenth-Circuit.pdf 

20.  https://www.pwc.com/us/en/services/tax/library/usdc-applies-economic-substance-doctrine-in-liberty-global.html       

21.   https://insightplus.bakermckenzie.com/bm/attachment_dw.action?attkey=i61AZmKfS9NEPCmYrJB%2BqqKGkK4vCBGD105GH%2BmKOOPUy63b0oyseKNxr5G%2FYB3RsJtcW36ifl%2FrJMTQ9Dev7VJJqt1c8PE%3D&nav=MOVTOne7ajY5Vm7jUGXQfKv%2F7eHL7Ou5Ph7y6lsL4f71hxeKcMczt4%2BGpOnmAgrx6HH%2BSO%2FuPtc%3D&attdocparam=J3hlk3I%2Bs4gI2UUWYgHwE6AQHygJqsTA9UPLOE6X7Kdzwm6QzU89XwdFCxXVSU9g9S7vnbmruMD66SU%3D&fromContentView=1 

22.   https://www.currentfederaltaxdevelopments.com/blog/2026/4/21/the-tenth-circuit-codifies-the-reach-of-the-economic-substance-doctrine-over-mechanical-statutory-compliance 

23.   https://kpmg.com/us/en/taxnewsflash/news/2026/04/tenth-circuit-taxpayer-refund-claim-denied-economic-substance-doctrine.html

24.  https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111421660.pdf

25.   https://rsmus.com/insights/tax-alerts/2026/tax-court-irs-relevance-economic-substance-test.html

26.  https://www.uschamber.com/cases/tax/liberty-global-v-united-states

27.   https://www.ca10.uscourts.gov/sites/ca10/files/opinions/010111286948.pdf

28.   

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A Texas federal judge has just delivered a major win to the microcaptive industry in Drake Plastics Ltd. Co. et al. v. IRS et al., case number 4:25-cv-02570, in the U.S. District Court for the Southern District of Texas, vacating the IRS’s latest attempt to treat a broad swath of 831(b) arrangements as “listed transactions” subject to the harshest reporting regime and penalties in the Code.

What Drake Plastics Is About

Drake Plastics Ltd. Co., its captive Drake Insurance Co., and SRA 831(b) Admin filed suit in the Southern District of Texas in June 2025, challenging an IRS regulation that designated many microcaptive insurance arrangements as listed transactions under the Administrative Procedure Act (APA). The plaintiffs alleged that Treasury and the IRS overstepped their statutory authority and short-circuited required APA procedures in an effort to pressure small and mid‑size businesses out of using 831(b) captives.

The case was filed as an APA challenge, not as a deficiency case: the plaintiffs asked the court to set aside the regulation itself, arguing that the government lacked sufficient evidence that the covered microcaptive transactions are “inherently abusive” or primarily tax‑avoidance devices.

The Court’s Ruling: Microcaptive Listing Vacated

In an April 2026 decision, the Southern District of Texas vacated the regulation that had designated microcaptive insurance transactions as listed transactions, holding that the IRS had not carried its burden to justify such a sweeping rule. The judge faulted the agency for failing to demonstrate that the targeted microcaptive structures are, in the aggregate, more likely than not to be tax‑avoidance schemes rather than legitimate risk‑shifting and risk‑distribution arrangements.

The practical effect of a vacatur—as opposed to a narrower, as‑applied ruling—is that the regulation is removed from the books, at least for now, and cannot be enforced against taxpayers while the decision stands. This eliminates, for the moment, the automatic “listed transaction” reporting obligations and the draconian penalty overlay that had been attached to the category of microcaptive transactions covered by the rule.

Why This Matters for 831(b) Captives

Microcaptives electing under section 831(b) have been a top priority for IRS enforcement for more than a decade, with numerous audits and promoter investigations focused on premium deductibility, risk distribution, and economic substance. By designating a broad class of these arrangements as listed transactions, the IRS dramatically increased disclosure burdens and raised the stakes with potential §6707A penalties for failures to report.

Drake Plastics strikes directly at that strategy. The court is essentially telling the government that it cannot label an entire category of risk‑management structures as presumptively abusive without building a robust evidentiary record and adhering to the APA’s rulemaking requirements. For closely held businesses and advisors who have argued that many 831(b) captives serve genuine risk‑management needs, the decision offers significant breathing room—but not carte blanche to ignore substantive tax rules.

Key Takeaways for Taxpayers and Advisors

For practitioners working with captives and small‑business clients, several practical points emerge from Drake Plastics:

·         The listed transaction rule for microcaptives has been vacated by a federal district court, reducing immediate reporting and penalty exposure tied specifically to that regulation.

·         The decision does not bless any particular microcaptive structure; the IRS still has multiple tools—economic substance, sham transaction doctrine, §482, and standard deductibility rules—to challenge abusive arrangements.

·         APA challenges remain a powerful avenue for pushing back on aggressive IRS regulations and notices, particularly where the agency relies on generalized assertions of abuse across an entire transaction category.

·         Taxpayers currently under examination or considering voluntary compliance around microcaptives should revisit their strategy in light of the vacatur, but only after a careful, fact‑specific review of their captive’s operations, underwriting, and claims history.

For tax advisors, Drake Plastics is a reminder that IRS enforcement initiatives can be vulnerable when they outrun the administrative record and underestimate APA constraints. At the same time, it underscores the importance of designing 831(b) captives that look and operate like real insurance companies—because even without a listed‑transaction label, weak fact patterns are still likely audit targets.

 Have an Micro Captive Tax Problem?

     Contact the Tax Lawyers at

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

1.       https://www.law360.com/articles/2466169/texas-judge-vacates-irs-steep-microcaptive-reporting-rule        

2.      https://www.law360.com/tax-authority/federal/articles/2466169/texas-judge-vacates-irs-steep-microcaptive-reporting-rule        

3.      https://dockets.justia.com/docket/texas/txsdce/4:2025cv02570/2011809

4.      https://finance.yahoo.com/news/sra-831-b-admin-drake-194500152.html 

5.       https://www.captiveinsurancetimes.com/citimes/CITimes_issue_286.pdf

6.      https://www.law360.com/cases/684089fdbf409683a474f971

7.       https://captivereview.com/news/drake-plastics-files-second-lawsuit-against-irs/    

8.      https://www.captive.com/news/drake-plastics-sues-irs-over-captive-insurance-premium-dispute    

9.      https://www.insurancebusinessmag.com/us/news/breaking-news/texas-plastic-company-sues-irs-over-new-rules-547153.aspx    

10.   https://captivereview.com/news/us-court-vacates-listed-transaction-designation-for-micro-captives-in-drake-plastics-case/

11.    https://app.midpage.ai/document/drake-plastics-ltd-co-v-1000451536860

12.   https://app.midpage.ai/document/drake-plastics-ltd-co-v-1000459115560

13.   https://law.justia.com/cases/federal/appellate-courts/ca1/06-2507/06-2507-01a-2011-02-25.html

14.   https://comptroller.texas.gov/programs/opioid-council/docs/teva-tx-state-wide-opioid-settlement.pdf

15.    https://casetext.com/case/drake-v-commissioner-3

16.    

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