Court Opinion

ID: 9929136
Source: CourtListenerOpinion
Date Created: 2024-02-01 20:01:46.467662+00
Date Added: 2024-06-11T10:17:27.567946
License: Public Domain

United States Tax Court

                          T.C. Memo. 2024-13

          BERNARD T. SWIFT, JR. AND KATHY L. SWIFT,
                         Petitioners

                                   v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              __________

Docket Nos. 13705-16, 5354-18,                  Filed February 1, 2024.
            11261-19.
                             __________

Jaime Vasquez, A. Leonides Unzeitig, Charles J. Muller III, and Stuart
H. Clements, for petitioners in docket Nos. 13705-16 and 5354-18.

Jaime Vasquez, A. Leonides Unzeitig, and Charles J. Muller III, for
petitioners in docket No. 11261-19.

Sharmeen Ladhani, David W. Sorensen, Alexander R. Roche, Vivian
Bodey, and John Robert Gordon, for respondent in docket No. 13705-16.

Sharmeen Ladhani, Sheila R. Pattinson, Alexander R. Roche, Vivian
Bodey, and John Robert Gordon, for respondent in docket Nos. 5354-18
and 11261-19.

       MEMORANDUM FINDINGS OF FACT AND OPINION

      URDA, Judge: Bernard T. Swift, Jr., is the founder of more than
a dozen urgent care centers and physical rehabilitation facilities in and
around San Antonio, Texas. From 2004 through 2015 Dr. Swift’s
businesses supplemented their traditional insurance by purchasing
assorted policies from microcaptive insurance companies that Dr. Swift

                           Served 02/01/24
                                            2

[*2] also controlled. 1 The premiums paid to the microcaptives dwarfed
more traditional insurance premiums, making for healthy deductions
for petitioners, Dr. Swift and his wife, Kathy L. Swift. Relying on
section 831(b), 2 the microcaptives themselves paid no tax on the
premium income received from their sister entities, investing the money
as directed by Dr. Swift.

       On each of their joint federal income tax returns for 2012 through
2015, the years at issue, the Swifts deducted, inter alia, more than
$1 million in premiums paid to the microcaptives and miscellaneous
legal fees.   The Internal Revenue Service (IRS) examined this
arrangement for each of these years and concluded that the
microcaptives used the trappings of insurance for purposes of tax
avoidance and financial planning. It accordingly issued notices of
deficiency that, inter alia, disallowed the claimed deductions and
determined accuracy-related penalties.

      Consistent with our decisions in Avrahami, 149 T.C. 144, Reserve
Mechanical Corp. v. Commissioner, T.C. Memo. 2018-86, aff’d, 34 F.4th
881 (10th Cir. 2022), Syzygy Insurance Co. v. Commissioner, T.C. Memo.
2019-34, Caylor Land, T.C. Memo. 2021-30, and Keating v.
Commissioner, T.C. Memo. 2024-2, we will sustain the IRS’s
determinations. 3

                               FINDINGS OF FACT

      We held a remote special trial session in these cases via ZoomGov.
We incorporate by reference the stipulation of facts, including the jointly

        1 “A ‘captive insurance company’ is a corporation whose stock is owned by one

or a small number of companies and which handles all or a part of the insurance needs
of its shareholders or their affiliates.” Caylor Land & Dev., Inc. v. Commissioner, T.C.
Memo. 2021-30, at *8 n.4; see also Harper Grp. v. Commissioner, 96 T.C. 45, 46 n.3
(1991), aff’d, 979 F.2d 1341 (9th Cir. 1992). “A ‘microcaptive’ is a small captive
insurance company,” i.e., one that “take[s] in less than $1.2 million in premiums.”
Caylor Land, T.C. Memo. 2021-30, at *8 n.4; see also Avrahami v. Commissioner, 149
T.C. 144, 179 (2017).
        2 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts are rounded to the nearest dollar.
       3 The Commissioner argues in the alternative that these insurance

transactions lack economic substance. We need not address this argument in light of
our conclusion that the captive insurance arrangement did not constitute insurance.
                                     3

[*3] stipulated exhibits contained therein. The Swifts lived in Texas
when they timely filed their petitions in these cases.

I.    Dr. Swift and His Medical Businesses

       Dr. Swift received his doctorate in osteopathy from the College of
Osteopathic Medicine in Des Moines, Iowa. He then served in the
U.S. Air Force as a flight surgeon assigned to Randolph Air Force Base
in San Antonio, Texas. Dr. Swift worked as an emergency physician on
the side, ultimately going full time after he left the military in 1980.

      A.     Texas MedClinic

      In 1982 Dr. Swift decided to open the Texas MedClinic (Clinic),
an urgent care center, rather than continue as an emergency physician.
He operated Clinic as a sole proprietorship during the years at issue
(2012 through 2015), with the Swifts reporting its tax information by
means of Schedules C, Profit or Loss From Business, attached to their
annual returns.

      Clinic was successful and grew. It expanded to 13 facilities by
2010. As of 2015, Clinic operated 18 locations in San Antonio, New
Braunfels, and Austin, Texas.

       Clinic’s practice focused on urgent care and occupational medicine
services, as well as minor surgical procedures such as the removals of
“lumps and bumps, cysts, . . . [and] skin tags.” The concept of urgent
care refers to “the treatment of urgent but non-life-threatening
problems.” Clinic thus “see[s] less critically ill patients . . . [with] the
usual litany of sprained ankles, sore throats, runny noses, eye injuries,
and whatnot.” Occupational medicine encompasses both “caring for
injured workers” and “deal[ing] with regulatory issues such as drug
testing, regulatory physicals, DOT physicals, [and] asbestos physicals.”

       From its founding through 2015, approximately 350 physicians
worked at Clinic as independent contractors. During each of the years
at issue, approximately 75 independent-contractor physicians worked at
Clinic. Clinic averaged gross income of $47,110,423 during the years at
issue.

      B.     Other Businesses

       Dr. Swift founded two other businesses relating to medical
services. In 2006 he formed an entity focused on sports rehabilitation
                                           4

[*4] (Rehab). 4 As of the end of 2014, Rehab operated eight physical
rehabilitation centers, all in Clinic locations and facilities.

      During 2012 through 2015 the Swifts filed Schedules C for Rehab
as part of their returns. Rehab was a more modest venture with around
12 employees and an average gross income of $1,697,494 during the
years at issue.

       Dr. Swift opened a separate dermatology practice, Derm Docs,
PLLC (Derm Docs), in 2007.          Derm Docs had one practicing
dermatologist and did not enjoy the success of the other Swift entities,
closing its doors in 2012. During its last year Derm Docs brought in
$224,073 in gross income.

II.     Traditional Insurance for Swift Entities

      During all years relevant to these cases, Clinic purchased,
separate from any captive policies, both medical malpractice insurance
and assorted other lines of general commercial insurance.

        A.      Commercial Medical Malpractice Coverage

                1.      Coverage

       Clinic bought claims-made medical malpractice insurance
policies for all years relevant to these cases. 5 During 2012 through 2015,
these policies each had a one-year term and featured no deductible, a
$500,000 per-claim limit, and an aggregate limit of $1.5 million.

       Clinic designated the same date as both the policies’ effective date
and retroactive date, thereby limiting the coverage to those claims that
both occurred and were reported during the one-year policy term. The
nature of an urgent-care practice meant that Clinic would be aware
“fairly quickly” of a catastrophic incident, and during all years relevant
to these cases, Clinic’s policies allowed Dr. Swift to trigger coverage by
reporting potential claims to carriers himself.

      4 In 2011 Rehab was converted from a sole proprietorship into a limited liability

company.
        5 A claims-made policy is generally “[a]n agreement to indemnify against all

claims made during a specified period, regardless of when the incidents that gave rise
to the claims occurred.” Claims-Made Policy, Black’s Law Dictionary (8th ed. 2004).
Such a policy “can also include a retroactive date that limits how far back the incident
could have happened.” Avrahami, 149 T.C. at 154.
                                     5

[*5] In 2003 Clinic spent $93,164 on premiums for its commercial
medical malpractice insurance, which declined to $66,639 by 2011. The
downward trend continued during 2012 through 2015, the years at
issue, with Clinic paying $67,059, $34,997, $34,997, and $41,997,
respectively, to cover itself and its sister entities. Dr. Swift attributed
the decrease to Texas’s efforts to limit medical malpractice liability,
which had become law in 2003.

             2.     Claims History

        From its founding until September 1, 2004, Clinic experienced
four medical malpractice claims (out of approximately 2,150,000 patient
visits), which resulted in settlements ranging from $35,000 to $450,000.
Dr. Swift credited Clinic’s success on this front to his proactive approach
to risk management, comprising (1) identifying potential weaknesses in
doctors, which he would address with “classroom type programs,”
(2) reviewing and providing feedback on each doctor’s medical records
for the first 90 days of employment, and (3) a peer review process for
physician complaints.

      From January 1, 2001, through November 1, 2012, Clinic’s
insurers paid $1,352,500 relating to medical malpractice claims. No
such claims were filed from November 1, 2012, through December 1,
2015.

      B.     Other Commercial Insurance Coverage

       In addition to medical malpractice policies, Clinic bought multiple
other lines of commercial insurance. From 2003 through 2011 Clinic
paid average annual premiums of $50,738 to obtain such coverage.
Clinic paid premiums of $70,030, $80,637, $78,980, and $66,306 during
2012 through 2015, respectively, for these policies.

       Clinic purchased a Premier Businessowners Policy to insure
buildings it owned up to their replacement cost (valued between $32
million and $45,545,000 during the years at issue), as well as business
income and equipment damage. It also bought coverage for doctors’
equipment (averaging $6,645,375 during the years at issue), accounts
receivable of $250,000, and fine arts (with an average value of $124,400
during the years at issue). Both of these policies included terrorism
coverage at no charge. Rounding out Clinic’s commercial insurance were
policies for fiduciary liability, crime coverage, workers’ compensation,
and business automobiles, as well as a $10 million umbrella liability
policy (which included excess coverage in 2014 and 2015).
                                     6

[*6] III.   First Foray into Microcaptive Insurance

       A.    Understanding the Arrangement

       The year 2004 marked a sea change in Dr. Swift’s insurance
approach. Before 2004, Clinic complemented its commercial medical
malpractice policies with a loss reserve of $500,000 to cover claims
falling outside the policy terms. In 2004 Dr. Swift discontinued the loss
reserve and set up the first of three microcaptive insurance companies,
Castlegate Insurance Co., Ltd. (Castlegate).

       Dr. Swift began “explor[ing] the possibility of creating a captive
insurance company” because Clinic’s medical malpractice “premiums
were rising at a rate that was . . . inappropriate given our attentiveness
to managing [its] risks and the insurance company’s risks.” Dr. Swift
claimed a desire to “control these policies and . . . control the[se] claims”
in a way that he could not with his traditional insurance carriers. He
also wanted to pay for “medical malpractice cover[age] with––before tax
dollars.”

      Dr. Swift’s interest led to Celia Clark, a New York lawyer who
specialized in the formation and maintenance of small insurance
companies for closely held domestic businesses. Also accompanying
Dr. Swift from the start was Tim Schultz, his certified public accountant
(CPA). These discussions did not begin with specific insurance offerings
that Dr. Swift wanted, but with (1) the financial advantages of operating
a microcaptive insurance company and (2) Ms. Clark’s understanding of
the legal requirements for a captive to be deemed a true insurance
company for tax purposes.

       As to the former, the parties discussed section 831(b), which
shields from taxation premium income of an insurer with less than
$1.2 million in annual premiums (i.e., a microcaptive insurance
company). Ms. Clark explained that premiums paid by Clinic to a
microcaptive controlled by Dr. Swift would be untaxed and could be used
“to purchase [additional] clinics or just land, leased to [Clinic.]”

      As to the latter, Ms. Clark emphasized the need for the
microcaptive to obtain risk distribution to be considered an insurance
company. Relying on her interpretation of our Court’s caselaw and IRS
actions, Ms. Clark asserted that 30% of the microcaptive’s total
premiums would need to come from unrelated businesses in order for
the arrangement to pass muster. Ms. Clark advised that “[t]he 30%
                                     7

[*7] unrelated insurance business is usually achieved through the
purchase (subscription) of a piece of reinsurance that relates to a pool.”

       During their talks, Ms. Clark explained that if Dr. Swift had “a
firm number in mind that [he] desired to use in payment of captive
premiums, we can work backward from that to determine appropriate
types and levels of coverage.” After deciding to proceed with the
arrangement, Dr. Swift and Ms. Clark decided that “tail” medical
malpractice coverage was appropriate. As Dr. Swift explained in 2004,
this coverage insured claims “that arise from acts committed prior to
[the effective date of Clinic’s commercial malpractice policy], but
reported after that date.”

       To price the coverage, Dr. Swift originally turned to his insurance
agent, who reported that “there is no way to obtain an actual quotation
covering back to the hire date of the physicians . . . as no carrier will
write ‘tail’ coverage only.” “Those carriers who are willing to write ‘tail’
coverage charge approximately 200% of the mature premium for an
unlimited extended reporting period.” The insurance agent estimated
$976,704 as the cost of the coverage with a $200,000 per-claim limit and
a $600,000 aggregate limit.

      B.     Castlegate

        Dr. Swift and Ms. Clark incorporated Castlegate in the British
Virgin Islands in October 2004. Castlegate was owned by a limited
partnership that, in turn, was controlled by the Swifts through a limited
liability company and a family trust in which they were trustees.

       Castlegate operated as an insurance company from 2004 through
2009. Each year it reported total premiums just under the $1.2 million
cap of section 831(b), as would allow for its premiums to go untaxed. The
percentage breakdown of premiums reflected Ms. Clark’s view of risk
distribution, with no more than 70% of total premiums attributable to
the tail coverage and no less than 30% attributable to Castlegate’s
participation in one of three risk distribution programs sponsored by
Ms. Clark.

             1.     Tail Coverage

      Castlegate issued its first tail insurance policy for Clinic on
November 7, 2004, using the same effective date as its commercial
medical malpractice policy. This policy was drafted by Ms. Clark and
Dr. Swift by marking up a preexisting commercial medical malpractice
                                    8

[*8] policy. In 2004 the tail insurance covered all current and former
Clinic physicians, featuring a $200,000 per-claim limit, a $3 million
aggregate limit, and a $15,000 deductible. The policy reflected a
premium of $976,700, as estimated by the insurance agent.

      Dr. Swift thereafter retained Anthony Bustillo of KPMG LLP
(KPMG), to determine premium estimates for the tail coverage. These
estimates included (1) a “pure premium” for the coverage derived from
industry and internal KPMG client data and (2) what is known in the
industry as “expense loads,” which were intended to capture
administrative expenses, profit, and contingencies. Dr. Swift ultimately
based the premium amount on this information.

      From the start, KPMG proved itself flexible in conducting this
analysis. KPMG’s first assignment was to provide a premium estimate
for Castlegate’s 2004–05 policy year (even though the policy had been
written and payments had been made). Mr. Bustillo determined an
indicated premium using a 22% load factor to account for expenses. He,
however, had failed to take into account the policy’s $15,000 deductible.
When alerted to that fact, Mr. Bustillo generated a revised report that
incorporated the deductible, raised the load factor to 30%, and produced
the same premium, according to Dr. Swift.

       For the next policy year, KPMG computed a premium estimate
for insuring “current [Clinic] physicians and [Clinic] (the entity)” and
not former physicians in the previous year’s policy—because, as
Dr. Swift explained in an email, “the calculated premium was going to
exceed the $840,000 if [they] included this group.”

       From 2004 through 2009, Clinic’s premiums for traditional
medical malpractice insurance averaged $100,538 per year, while the
tail coverage premiums averaged $825,830. During this time five claims
were made against the policy, resulting in total liabilities of $615,000.

             2.     Risk Distribution Programs

        Castlegate participated in three risk distribution programs
affiliated with Ms. Clark during its years as an insurance company. As
most relevant here, in 2009 Castlegate participated in a risk distribution
program involving Pan American Reinsurance Co., Ltd. (Pan American).
Under this program, a business insured by a Clark-affiliated
microcaptive (like Clinic) would buy terrorism insurance directly from
Pan American. Pan American, in turn, would enter into an agreement
with the affiliated microcaptive (think Castlegate) under which the
                                          9

[*9] microcaptive would reinsure a portion of the blended risk from the
underlying terrorism insurance.

       The premium received by the microcaptive for such reinsurance
coverage would match the amount that the affiliated business had paid
to Pan American for the terrorism insurance. This amount would also
represent at least 30% of the microcaptive’s total premiums. We take
judicial notice of our holdings in Avrahami that “Pan American was not
a bona fide insurance company” and that “we cannot find that the
policies it was issuing were insurance.” Avrahami, 149 T.C. at 184–90;
see Fed. R. Evid. 201.

               3.      Investments

       Castlegate’s healthy premiums coupled with modest expenses
and claims history meant that it had significant resources on hand. By
the end of 2008, Castlegate had invested (1) approximately $2 million in
three real estate partnerships that bought land for the future use of
Clinic and (2) approximately $3 million in mutual funds and equity
securities. In 2009 Castlegate stopped issuing policies, and in 2011 it
was domesticated and turned into an investment company.

IV.    The Second Generation of Swift Microcaptives

       A.      Formation

      In October 2010 Ms. Clark assisted Dr. Swift with the formation
of two new microcaptives, Castlerock Insurance Co., Ltd. (Castlerock),
and Stonegate Insurance Co., Ltd. (Stonegate) (collectively, Swift
captives). These captives were incorporated in the Federation of St.
Christopher and Nevis (St. Kitts) and licensed to operate as insurance
companies from the St. Kitts Financial Services Regulatory
Commission. 6

               1.      Preliminaries

      The record contains no feasibility study verifying the need for two
captives. Dr. Swift focused on premiums by stating:

        6 In 2006 Ms. Clark assisted in drafting captive insurance legislation for the

island of St. Kitts, which was reviewed and revised by legislators and attorneys from
St. Kitts.
                                    10

[*10] The only policies that have been issued to date for
      Castlegate . . . are medical malpractice, terrorism, and
      Credit Re policies. . . . In order to get closer to maxing out
      the premiums, I will be looking for other risks to insure,
      both from related entities, and also unrelated. Celia has
      indicated that a reasonable limit for the terrorism
      insurance . . . is probably not more than $400,000.
      Actually, we’re thinking in terms of having the captives
      write a stop loss policy for [Clinic’s] self insured health
      insurance plan. That premium might come in at $150,000-
      200,000 for example. And then there might be others as
      well. Whatever might come up, and whatever you and Celia
      can come up with for unrelated party premiums.

A few months later he reaffirmed that “the number of other policies [the
Swift captives] write will depend on the total premiums,” estimating
that “about $1.5-1.6M in total premiums . . . will probably be all [Dr.
Swift] can come up with through [Clinic] this year.” For her part, Ms.
Clark verified that “[Clinic] will not be limited to $1,200,000 for the
group.”

       The business plans of Castlerock and Stonegate set forth concerns
about the ability to obtain medical malpractice coverage at a reasonable
cost, risks presented by government regulation of the healthcare
industry, and threats presented by competition. The plans also
indicated that the Swift captives would participate in a “pool with other
captive insurance companies . . . [that] will cover business risks relating
to terrorist attacks and other hazards . . . [because,] [i]n the United
States, it is difficult and expensive to obtain appropriate levels of
terrorism risk insurance.”

             2.     Execution

       The Swift captives were incorporated in October 2010, with each
owned by a trust for one of the Swifts’ two children. Dr. and Mrs. Swift
were the trustees of both trusts, and neither of the children had any role
in the operation of the Swift captives. Dr. and Mrs. Swift also served as
treasurer and assistant treasurer, respectively, for each of the Swift
captives, which gave them authority to open any bank, brokerage, or
investment accounts required by the captives.

      The directors of the Swift captives were two Kittian companies,
Corporate Solutions, Ltd., and Heritor Management Ltd. (Heritor). The
                                   11

[*11] former supplied the principal office, registered office, and
registered agent for the captives. The latter provided services including
claims management and processing, obtaining insurance licenses,
monitoring St. Kitts regulatory compliance, maintaining statutory
insurance records, executing insurance policies, and invoicing. Under
Heritor’s service agreement with the Swift captives, claims were to be
approved and paid out unless Heritor believed coverage was unclear or
if the claimed losses were over $50,000, at which point the claim was
referred for a second opinion.

       Both Swift captives elected to be treated as domestic corporations
for United States tax purposes under section 953(d) and elected under
section 831(b)(2)(A)(ii) to be taxed solely on investment income. Each of
the Swift captives was initially capitalized for $36,500, and no
additional capital contributions were made to either captive through the
end of 2015.

      B.     Direct Insurance Offerings

       The Swift captives sold multiple lines of insurance to Clinic
(covering Clinic, Rehab, and Derm Docs), with each policy featuring the
same pricing and an agreement between the two to share any liability.
In total the captives received the following premiums between 2010 and
2015:
                                              12

[*12] Policy        2010          2011         2012           2013         2014         2015
Medical             $910,562     $946,134     $812,860       $741,644      649,396     $593,522
Malpractice
Administrative       101,000      155,936      170,000         102,000       52,000       55,000
Actions
Business             116,000      286,136      435,000         134,000      —            —
Income
Business Risk         60,000        73,674         68,000       44,000      —            —
Indemnity
Computer              14,000        22,869         50,000       33,000      —            —
Operations &
Data
Employment            31,000        43,256         70,000       37,000       29,000       22,000
Practices
Liability
Litigation            77,000      150,364      225,000          43,000       18,000       10,000
Expense
Cost of              —             —               14,000       14,000        7,000        7,000
Defense
Terrorism            360,000      719,300      540,000         —            —            —
Political            —             —            —              231,000     384,000      384,000
Violence
TOTAL             $1,669,562    $2,397,669   $2,384,860     $1,379,644   $1,139,396   $1,071,522

        As the years at issue are 2012 through 2015, we will provide an overview
        of the policies as in effect those years.

                     1.    Malpractice Tail Coverage

                           a.       Policy Terms

              The tail coverage hewed closely to the model developed by
        Castlegate, with a $15,000 deductible, $300,000 per-claim limit, and a
        $6 million annual aggregate limit. The policy covered claims relating to
        professional services rendered at a Clinic facility between the date the
        respective physician began work at Clinic and the first day of the policy
        period. The policy provided coverage “only if” the claim was reported
        within ten days of receipt of written notice by the insured.
        Endorsements to the policies included lists of former and current
        physicians who were covered, including approximately 140 physicians
        who had left Clinic between 1983 and 2000.
                                      13

[*13]                b.     Pricing

       Like Castlegate, the Swift captives engaged KPMG (again,
Mr. Bustillo) to prepare annual actuarial pricing analyses. To provide
its estimates, KPMG received information including copies of the
commercial medical malpractice policies, a report showing all medical
malpractice claims and payments since Clinic’s inception, and a list of
all currently employed and formerly contracted physicians and their
length of time with Clinic. KPMG’s pricing analyses relied on internal
KPMG and industry sources on the ground that the Swift captives’ loss
experience was “too sparse to be fully credible on its own.”

       To determine the premium for each physician, KPMG stated that
it looked to (1) mature claims-made premiums for the policy limits of
$300,000 per claim and $6 million in the aggregate, (2) reporting lag
factors, (3) physician specialties and (4) the period of exposure. KPMG
then offered a range of loads “to contemplate administrative expenses,
profit and contingencies,” which would be added to the pure premium to
determine the premium. Dr. Swift ultimately chose the load percentage,
determined the deductible amount, and drafted the medical malpractice
policies.

              2.     Nonmedical Coverage

                     a.     Policy Terms

       At various times during 2012 through 2015 the Swift captives
offered nine other lines of insurance:

   •    Administrative Actions: These policies covered legal expenses,
        fines, and assessments arising from an administrative action or
        disciplinary proceeding instituted against the Swift entities.
        These policies had a per-event limit of $1 million and an
        aggregate limit of $3 million.

   •    Business Income: These policies covered business income that the
        Swift entities lost as the result of reputational damage, new
        competition, or a legislative or regulatory change. The policies
        had a per-event limit of $2 million and an aggregate limit of
        $5 million. These policies were not purchased in 2014 and 2015.

   •    Business Risk Indemnity: These policies offered excess coverage
        for business liabilities caused by “construction defects” or events
        excluded under the policyholder’s commercial policies—for
                                    14

[*14] example, losses from asbestos, climate change, or fungi. The
      policies did not extend to cover professional liability and had a
      per-event limit of $1 million in 2012, and $500,000 in 2013, and
      an aggregate limit of $3 million in 2012, and $500,000 in 2013.
      These policies were not purchased in 2014 and 2015.

   •   Computer Operations and Data: These policies indemnified the
       Swift entities against increased cost of working and
       reinstatement of data arising out of computer-related
       malfunctions at covered Clinic locations. The policies had a per-
       event limit of $1 million and an aggregate limit of $1.5 million.
       These policies were not purchased in 2014 and 2015.

   •   Employment Practices Liability: These policies were excess
       coverage, insuring against expenses incurred in defending
       against employee claims, including discrimination, sexual
       harassment, and retaliation. The policies had a per-event and
       aggregate limit of $2 million.

   •   Litigation Expense: These policies were excess coverage, insuring
       any expenses incurred in defending a legal proceeding related to
       business activities, prosecuting a third party over a matter
       pertaining to the business, or obtaining any legal consultation
       pertaining to the business. The policies had a per-event limit and
       an aggregate limit of $2.5 million in 2012, $250,000 in 2013, and
       $100,000 in 2014 and 2015.

   •   Cost of Defense: These policies were excess coverage, offering
       insurance for “1) the defense [of ] any Claim instituted against an
       Insured [or its officers and directors] . . . ; 2) any private or
       governmental Administrative Action . . . ; and 3) any arbitration,
       mediation, or other alternative dispute resolution.” The policies
       had a per-event and aggregate limit of $10,000.

   •   Terrorism: The policy insured against acts of terrorism, as
       defined in the Terrorism Risk Insurance Act, as well as assorted
       acts (such as the dispersion of biological and chemical agents)
       that result in losses exceeding $100 million, which were
       committed with the intent to influence or coerce the
       U.S. government. The policy did “not apply to loss recoverable . . .
       under other insurance or indemnity,” nor did it cover a loss
       resulting from acts “occurring in a city with a resident population
       greater than two million (2,000,000).” The policy had a per-event
                                    15

[*15] and aggregate limit of $6,750,000. This policy was discontinued
      after 2012.

   •   Political Violence: The policy insured Clinic for losses to its
       buildings (including the removal of debris) and its net income
       against assorted events including acts of terrorism, sabotage,
       riots, mutiny, civil war, and the use of biological chemical, or
       nuclear weapons (causing more than $100 million in damage and
       which were committed with the intent to influence or coerce the
       United States government). The policy did not apply “to loss
       recoverable . . . under other insurance or indemnity.” It had a
       per-event and aggregate limit of $3.3 million and was in effect
       from 2013 through 2015.

      Between 1982 and December 2010 Dr. Swift had not purchased
similar coverage for his medical entities from commercial insurance
companies. Dr. Swift’s commercial insurance provider was not aware of
the existence of the Swift captives, much less these specific lines of
coverage, during the years at issue.

       These policies featured some unusual terms. Several of the
policies identified a claims notification period “as a condition precedent
to payment of any benefit.” The policies also provided for payment by
promissory note if Clinic “suffers a series of catastrophic loss
occurrences that may impair [Clinic’s] solvency.” And the policies each
provided for termination “upon the insolvency or bankruptcy of the
insured.”

                    b.    Pricing

       To price the Swift captives’ nonmedical malpractice policies,
Ms. Clark turned to Allen Rosenbach, an actuary for ACR Solutions
Group, Inc. Ms. Clark (or someone working for her) would send
Dr. Swift’s annual selections and supporting materials to
Mr. Rosenbach. This material included information about business
metrics, including prior year revenue and expenses, average number of
patients, average revenue per patient, payroll, number of employees,
prior claims, and changes in business practices.

      Mr. Rosenbach prepared a report with premium estimates for
each desired line of coverage. The report for each year (and each Swift
captive) used stock terms on such estimates:
                                   16

[*16] [T]he base rates and rating factors developed in this report
      were based on a survey of rating plans obtained from
      regulatory filings submitted by commercial insurance
      carriers in the United States of America. . . . Where
      comparable coverages were unavailable, we used
      professional judgment to develop reasonable rating
      guidelines to reflect the expected loss potentials. The
      Company and/or its representatives supplied key
      information, both qualitative and quantitative, to help
      develop the underlying frequency and severity parameters
      in the base rates. Indicated rates were also reviewed and
      tempered to reflect historical consistency and rate-on-line
      ranges.

       The reports also included boilerplate regarding coverage
comparisons. Specifically, the reports stated that “many of the
coverages provided by the Company are either unavailable or
unaffordable in the commercial insurance market” and thus
“adjustments were made to modify the commercial rates and rating
factors to reflect our interpretations of the differences in the captive
insurance policies.”

       During most of the years at issue Ms. Clark (or one of her
employees) provided Mr. Rosenbach with a target for the Swift captives’
premiums. In November 2012, for example, an attorney working with
Ms. Clark sent Mr. Rosenbach a memorandum indicating that the
captives wished to renew six policies then in effect, which had a
$366,118 premium for each Swift captive. The attorney further stated
that “the client’s total maximum premium is $1,587,140 to be divided
evenly between Castlerock and Stonegate,” including general cost of
defense and terrorism risk insurance. Mr. Rosenbach ultimately
reached an estimated premium of $1,572,000 for the Swift captives’ 2012
nonmedical policies.

       Mr. Rosenbach incorporated feedback from Ms. Clark and her
team into his analyses. In November 2013 an attorney working with
Ms. Clark wrote Mr. Rosenbach a memorandum detailing the policies
selected for 2013, which reflected a premium of $786,000 for each of the
Swift captives. The attorney further stated that the “client’s total
maximum premium target is $458,356 to be divided evenly between [the
Swift captives.]” After Mr. Rosenbach provided his initial calculations,
the attorney responded that the Swift captives’ “requested level is
extremely low this year” and asked if he would “mind seeing if limits
                                    17

[*17] could be lowered to meet the lower premiums?” Mr. Rosenbach
complied. He also worked with the attorney to adjust the premium
numbers to hit 30% risk distribution rather than 29.7%.

       This collaborative approach to premium pricing was repeated in
2014 and 2015. During those years Mr. Rosenbach made premiums
higher or lower as Ms. Clark’s employees instructed, with an eye on 30%
risk distribution. In 2015 one of Ms. Clark’s employees noted that the
premiums were “very lopsided” and asked whether it would be “possible
to adjust the limits upwards and allocate more premium to policies other
than [political violence]?” In a later email the lawyer further requested
Mr. Rosenbach to “raise the limits on Administrative Actions to a level
over $200,000,” noting that the “limit should be raised further if needed
to achieve the 30+% risk distributions on the cessions.”

      C.     Claims

       Clinic paid the Swift captives a total of $5,975,422 during 2012
through 2015 (following more than $4 million in 2010 and 2011) to
obtain the various lines of insurance coverage. In contrast, Clinic
submitted three claims to the Swift captives during the years at issue,
resulting in total payments of $339,224 (as of the end of September
2015).

       The first of the three claims was made under the 2011–12 medical
malpractice tail coverage policies, relating to a Texas state court
lawsuit. Clinic received service of this suit on February 1, 2012,
although it previously had been sent letters dated November 23, 2010,
and July 21, 2011, complaining to Clinic about treatment received on
November 22, 2010, and threatening legal action. Although the policy
required reporting of the claim “within ten (10) days of receipt by [Clinic]
of a written notice of a Claim,” a lawyer working for Ms. Clark sought
and received an extension after notifying the Swift captives of the
lawsuit on November 6, 2012. Heritor ultimately authorized payment
of $13,212 with respect to this claim, which was closed in 2015.

       The second claim was made on August 29, 2013, under the
Litigation Expense and Administrative Action policies in effect for 2011
through 2012. Clinic sought the payment of legal expenses incurred in
defending a wrongful termination lawsuit stemming from a dismissal on
October 26, 2012. Although the policies provided that a “Claims
Notification Period of 30 days from the date of occurrence of an Insured
                                   18

[*18] Event shall exist as a condition precedent to payment of any
benefit hereunder,” Heritor granted Clinic’s extension request.

       During the pendency of this claim, the “Cost of Defense policies
with both Captives [were] exhausted,” so a member of Ms. Clark’s team
requested that excess expenses “be applied instead to the Litigation
Expenses policies.” Before mediation in that case, another member of
Ms. Clark’s team represented that the fact that the policy requires the
Swift captives to consent in writing to a settlement “doesn’t necessarily
mean that Dr. Swift has to consult with the [Swift] captive[s] before
finalizing the settlement.” According to the lawyer, she suspected that
Heritor would provide “a letter approving coverage for the future
settlement.”

       The Swift captives paid a combined total of $108,012, net a
contribution of $3,439 from the risk distribution pool in which they were
participating at the time (which will be discussed below). Even after
closing, Heritor reopened the claim to approve additional expenses.

      Clinic provided notice of the final claim on October 16, 2014,
under the Administrative Actions policy issued on December 1, 2013.
This notice followed a memorandum from Ms. Clark dated September
12, 2014, in which she stated to her “Clients” that their businesses “may
have coverage under an Administrative Actions Insurance Policy issued
by your captive for legal and administrative fees relating to a pending
IRS audit.” Ms. Clark’s firm reported on Clinic’s behalf that the
Department of the Treasury had initiated an audit on February 20,
2014. Again, Heritor approved the untimely claim and ultimately
authorized payments totaling $275,793 by the end of 2015.

      D.     Investment of Premiums

       During 2010 through 2015 the Swift captives received just over
$10 million in premiums. With the relatively small claims and
expenses, the Swift captives had considerable ready money, which
Dr. Swift invested in (1) real estate, buying and developing property for
three urgent care facilities later leased to Clinic, and (2) the stock
market, through investment accounts with Fidelity and the ownership
of two limited liability companies organized in 2013. In total the Swift
captives invested more than $8 million of the premiums received from
2010 through 2015.

      Given the illiquid nature of a large portion of the Swift captives’
investment portfolio, Ms. Clark advised Dr. Swift in April 2013 to
                                   19

[*19] indemnify the Swift captives and protect them “against future
capital calls they may be unable to meet because of insurance claims.”
In June 2013 Dr. Swift issued a put option to both Swift captives that,
if needed, required him to purchase either or both Swift captives’ entire
interest in the real estate partnership at a price determined by an
appraisal process. The agreements then provided that Dr. Swift could
pay via a promissory note to be paid in three equal installments, with
the first payment to occur about 30 days after the closing date. Later
that year, Ms. Clark’s firm recommended that, going forward “the
captive[s] keep[] 30% of the annual premium in cash or cash
equivalents.”

      E.     Risk Distribution and Reinsurance Program

             1.    Structure

      During 2012 through 2015 the Swift captives participated in two
risk distribution pools affiliated with Ms. Clark: Jade Reinsurance
Group, Inc. (Jade), in 2012 and 2013, followed by Emerald International
Reinsurance, Inc. (Emerald), in 2014 and 2015. Jade and Emerald were
both Alabama captive insurers, formed to “function as . . . vehicle[s] to
pool diverse risks ceded to [them] by” Clark-related microcaptive
insurance companies.

       As Ms. Clark explained to Mr. Rosenbach when requesting help
on “the actuarial end,” “[a]fter three years of using terrorism risk
through a reinsurance structure to accomplish risk distribution, [her
team was] re-designing the pool to include more types of coverage.” The
pools thus represented the next links in the evolutionary chain following
the Pan American risk distribution program, in which the Swift captives
had participated in 2010 and 2011.

       At a high level, Jade (and then Emerald) agreed to reinsure a
portion of the risks written by participating Clark-affiliated captive
insurance companies, with all of the participating captives, including
the Swift captives, paying premiums to the pool for such coverage. In
turn, the self-same captives each contracted with the respective pool to
reinsure a quota share portion of the pool’s blended liability, with the
pool paying for this coverage by releasing a percentage of the total
premiums that had been paid to it by all the captives. In Ms. Clark’s
view the premium amounts retroceded to the captives pursuant to this
arrangement constituted unrelated business premiums for risk
distribution purposes. She touted in 2014 that both pools were
                                         20

[*20] “independently managed and have been designed and organized
to be in compliance with IRS rulings issued in 2012, and to result, in
most cases, in risk distribution well above 30%.”

      Turning to specifics, Jade and Emerald both grouped the various
insurance policies that could be reinsured as part of their pool as
Coverage Part A, B, or C. 7 For policies under Coverage Part A, Jade
agreed to insure a net loss above $200,000 in 2012 and $100,000 in 2013,
subject to limits of liability of (1) 51% of $800,000 over the $200,000 for
2012 and (2) 55% of $900,000 over $100,000 for 2013.

       For its part, Emerald divided Coverage Part A policies on a per-
occurrence limit of $100,000. For the policies below this line, Emerald
agreed to cover (1) 80% of a loss over 50% of the per-occurrence limit in
2014 and (2) 100% of a loss over $50,000 up to the occurrence limit in
2015.     For policies above $100,000 in per-occurrence limits, a
participating captive was liable for the first $100,000 and Emerald was
liable above that amount subject to (1) a maximum of 80% of the
$900,000 over the initial $100,000 for 2014 and (2) 100% of the losses up
to $1 million for 2015. The aggregate limits were $720,000 and $950,000
for 2014 and 2015, respectively.

       In return for this coverage, Jade received a percentage of the
original gross policy premium that varied depending on occurrence
limits (with higher occurrence limits being charged a lower percentage).
Emerald, on the other hand, charged a flat 30.3% reinsurance premium
for Coverage Part A policies during 2014 and 2015.

       The arrangements with respect to Coverage Parts B and C,
including General Cost of Defense and Terrorism or Political Violence
policies, respectively, had many fewer moving parts. For Coverage
Part B, Jade agreed to pay $10,000 per claim and in the aggregate, while
Emerald agreed to 100% liability of each loss occurrence, capped at
$15,000.

        7 Coverage Part A policies included the following types of insurance policies:

(1) Administrative Actions; (2) Administrative Actions (Physicians); (3) Business
Income and Extra Expense; (4) Business Risk Indemnity; (5) Computer Operations and
Data; (6) Contract Cancellation; (7) Cyber Protection; (8) Directors and Officers
Liability; (9) Employee Fidelity; (10) Employment Practices Liability; (11) Kidnap,
Ransom and Extortion; (12) Litigation Expense; (13) Loss of Key Employee; and
(14) Tax Indemnity. Coverage Part B consisted of General Cost of Defense Insurance.
Coverage Part C consisted of Terrorism or Political Violence Insurance.
                                    21

[*21] For Coverage Part C, both Jade and Emerald agreed to reinsure
a percentage of the underlying premiums, depending on the client’s
preference. This approach was consistent with Ms. Clark’s view in 2012
(when setting up Jade) that terrorism and political violence policies
could be used as necessary to assure the desired risk distribution.

      Despite the multitude of steps under each program, Ms. Clark
assured participants that “[i]n all cases, the total premiums ceded to
Jade [or Emerald] by a [captive] will be at least 30% and will usually be
substantially above that.”

       The reinsurance by Jade and Emerald was only one side of the
coin, however. Jade and later Emerald also entered into quota share
retrocession agreements with the participating captives to retrocede a
quota share of the pool’s blended risk from each Coverage Part to each
participating captive.

       In return for effectively reinsuring its reinsurer, each
participating captive, including the Swift captives, received premiums
corresponding to the quota share of risk retroceded. These amounts
would “not be released to the captives immediately” but held in a trust
account and released to the participating captives in tranches
throughout the year. Pursuant to the Jade pool, “half of the funds
[would] be released” from the trust account after 90 days, with the
remainder released after 180 days, “less a . . . holdback as a continuing
loss reserve until the end of the policy period (one year plus any
extended reporting period).”

         Emerald tweaked Jade’s approach somewhat. In 2014 Emerald
built in “a 5% holdback as a continuing loss reserve until all obligations
of the pool [had] been settled and paid,” anticipating that the trustees
might be directed to reserve greater amounts. In 2015 the funds were
to remain in the trust account for 180 days, “at which time half of the
funds not used to pay losses or reserved for expected losses [would] be
released.” After 280 days 25% of the original amount would be released
(less the funds used to pay losses or which were reserved). The
remaining funds would be released “when all obligations of the pool
[had] been settled and paid.” If at any time Emerald held amounts “less
than those required to pay [l]osses,” the participating captives were
required to, “within thirty (30) days of notice[,] provide additional funds
. . . for amounts equal to such difference.”
                                   22

[*22] If the respective pool did not have enough money in its accounts
to cover a filed claim, each captive in the pool would be asked to pay its
fair share of the claim to the pool. In planning conversations with
Mr. Rosenbach about Jade, Ms. Clark identified “meaningful deterrents
to claims against the pool.” Among other things, she noted that the pool
excluded high severity and high frequency lines of insurance, that each
captive would need to pay up to its retained limit before making a claim,
and that the pool would have the authority to exclude an insured making
excessive claims from future pools.

      Despite skin-deep differences between Jade and Emerald, their
general structure was the same and can be seen from a diagram included
in Ms. Clark’s 2015 memorandum overviewing Emerald:

       To participate in the programs, a captive was required to submit
an application for reinsurance to the relevant pool, which requested a
limited range of information: entity name, business organization (e.g.,
sole proprietorship), location, business activity, gross revenue, value of
property insured, and whether the reinsurance company had previously
received any claims. Ms. Clark then circulated the applications to all
other pool participants, who had less than a week to determine whether
to exclude fellow participants from their respective pool. Dr. Swift, for
example, chose to exclude three applications in 2015 because of different
property value and revenue. The captive thereafter would enter into a
trust agreement, a reinsurance agreement, and a quota share
retrocession agreement, as necessary to participate in both risk
distribution programs.
                                         23

[*23] The fees for participation in Jade and Emerald were $5,000 in
2012, $6,000 in 2013, and $6,325 in 2014 and 2015. All told, 94 captives
participated in Jade with a total gross volume of $22,700,000 in 2012
and $33,100,000 in 2013. With respect to Emerald, 150 captives
participated with total gross volume of $36,600,000 in 2014, and
159 captives with total gross volume of $36,200,000 in 2015.

               2.      The Swift Captives’ Participation in Jade and
                       Emerald

                       a.     2012 and 2013

       The Swift captives participated in the Jade reinsurance pool in
2012 and 2013. In the first year each of the Swift captives had premiums
of $1,192,430, and Jade reinsured $360,050, which represented 30.2% of
the total. The amounts retroceded to the Swift captives under the quota
share agreement matched the amount paid to it. The pattern of
matching premiums was repeated in 2013, with Jade receiving
reinsurance premiums of $207,450 (30.1% of total premiums of
$689,822) from each of the Swift captives, and the Swift captives
receiving the same amounts in their roles as retrocessionaires. All told,
the Swift captives received back 99.59% and 98.74% of the reinsurance
premiums they paid to Jade in 2012 and 2013, respectively. 8

                       b.     2014 and 2015

       The Swift captives’ experience with Emerald was more of the
same. Specifically in 2014 each captive had total premiums of $569,698,
resulting in $171,450 in premiums reinsured by Emerald (30.1% of the
whole) and retroceded from Emerald to each captive. Likewise, in 2015,
each captive had total premiums of $535,761 and reinsurance premiums
and premiums retroceded of $170,800, which constituted 31.9% of the
whole. Ultimately, the Swift captives each received back 94.98% and
98.99% (before the final distribution) of the reinsurance premiums paid
to Emerald in 2014 and 2015, respectively.

        8 Under the 2013 pool, two claims to captive insurance companies reinsured by

Jade were approved, and Jade was responsible for $360,853 of loss, payable from trust
funds. In January 2014 Jade also paid the Swift captives $1,719 for a claim payment
related to pool coverage under Coverage B.
                                     24

[*24] V.    IRS Examination and Notices of Deficiency

      The Swifts’ tax returns were prepared by their CPA, Mr. Schultz,
who had done so since 2004. For tax years 2012 through 2015, the Swifts
reported gross income, total expenses, and insurance expense (other
than health insurance) as follows:

           Year   Gross Income   Total Expenses   Insurance Expense
           2012   $51,939,335     $50,037,253        $2,518,374
           2013    45,778,832      45,194,057         1,495,278
           2014    45,214,460      43,535,206         1,253,373
           2015    45,509,064      44,273,720         1,181,184

Clinic was the only Swift entity that claimed insurance deductions for
the captive insurance premiums.

      A.     Examination

       The IRS conducted an examination into the Swifts’ tax returns
for each of the years at issue. Revenue Agent Allen Sohrt conducted the
examination with respect to the Swifts’ 2012 through 2014 tax years and
Revenue Agent Elia Maglaya conducted the examination into their 2015
tax year.

             1.      2012 and 2013

       On December 31, 2015, Revenue Agent Sohrt notified the Swifts
via letter that he had completed his review for their 2012 and 2013 tax
years and recommended disallowance of the applicable captive premium
payments, although the final decision rested with IRS District Counsel.
In his letter he also pointed out that he recommended the imposition of
20% accuracy-related penalties in his revenue agent report. About a
week later, on January 4, 2016, Group Manager Cynthia Tam signed a
Civil Penalty Approval Form approving the assertion of 20% accuracy-
related penalties under section 6662(c) and (d) for the Swifts’ 2012 and
2013 tax years.

             2.      2014

       Two years later, Revenue Agent Sohrt completed his examination
for the Swifts’ 2014 tax year and, on October 2, 2017, sent the Swifts
Form 4549, Report of Income Tax Examination Changes, for that year.
The report reflected a 40% accuracy-related penalty but did not include
                                          25

[*25] the 20% penalty. On October 19, 2017, Group Manager Tam
signed Civil Penalty Approval Forms for the Swifts’ 2014 tax year. In
addition to the 40% penalty shown on the revenue agent’s report, Group
Manager Tam approved, in the alternative, a 20% accuracy-related
penalty for both negligence and substantial understatement.

                3.      2015

      As to 2015, Revenue Agent Maglaya likewise recommended the
accuracy-related    penalty    for    negligence    and     substantial
understatement. Group Manager Arturo Velasquez signed a Civil
Penalty Approval form on April 9, 2019, approving the penalty. By letter
dated April 9, 2019, Group Manager Velasquez sent to the Swifts an
examination report that, inter alia, took the position that the 20%
accuracy-related penalty applied.

        B.      Notices of Deficiency

       The IRS issued three notices of deficiency to the Swifts,
disallowing the amounts deducted as insurance premiums and related
legal expenses. 9 The IRS first issued to the Swifts a notice of deficiency
that determined for 2012 and 2013 deficiencies of $893,809 and
$596,855 (stemming from the disallowance of deductions for the
insurance premiums and related legal and professional expenses), as
well as alternative 20% accuracy-related penalties under section
6662(a). The IRS later issued a notice of deficiency determining a
deficiency of $494,259 for their 2014 tax year, as well as an alternative
20% accuracy-related penalty. The IRS finally issued to the Swifts a
notice of deficiency for their 2015 tax year determining a deficiency of
$461,524 and a 20% accuracy-related penalty as an alternative position.

                                      OPINION

I.      Burden of Proof

       In general the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving that the determinations are in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). The taxpayer bears the burden of
proving entitlement to any deduction claimed. INDOPCO, Inc. v.

        9 The notice of deficiency for each year at issue also determined a 40% accuracy-

related penalty. The Commissioner has since conceded that penalty, and we
accordingly will not address it.
                                          26

[*26] Commissioner, 503 U.S. 79, 84 (1992). Thus, a taxpayer claiming
a deduction on a federal income tax return must demonstrate that the
deduction is provided for by statute and must maintain records
sufficient to enable the Commissioner to determine the correct tax
liability. See I.R.C. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas. Reg.
§ 1.6001-1(a).

        If, in any court proceeding, the taxpayer puts forth credible
evidence with respect to any factual issue relevant to ascertaining the
liability of the taxpayer and meets certain other requirements, the
burden of proof shifts to the Commissioner. I.R.C. § 7491(a)(1) and (2). 10
When each party has satisfied its burden of production, then the party
supported by the weight of the evidence will prevail, and thus a shift in
the burden of proof has real significance only in the event of an
evidentiary tie. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008),
supplementing T.C. Memo. 2007-340.

       We do not perceive an evidentiary tie in these cases and are able
to decide the issues on the preponderance of the evidence. See, e.g.,
Bordelon v. Commissioner, T.C. Memo. 2020-26, at *11.

II.    Insurance

       A.      General Principles

      Section 162(a) allows the deduction of “all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on any trade or business.” Insurance premiums are typically deductible
under section 162(a) as ordinary and necessary expenses if paid or
incurred in connection with a trade or business. Treas. Reg. § 1.162-
1(a).

      Insurance companies are generally taxed on taxable income,
including premium income and investment income, in the same manner
as other corporations. See I.R.C. § 831(a); see also Syzygy, T.C. Memo.
2019-34, at *27. Section 831(b), however, provides an alternative taxing
structure for certain small insurance companies. See Avrahami,

        10 The U.S. Court of Appeals for the Fifth Circuit, to which an appeal in these

cases would ordinarily lie, see I.R.C. § 7482(b)(1), has likewise held that, if an
“assessment is arbitrary and erroneous, the burden shifts to the government to prove
the correct amount of any taxes owed,” Portillo v. Commissioner, 932 F.2d 1128, 1133
(5th Cir. 1991), aff’g in part, rev’g and remanding in part T.C. Memo. 1990-68.
                                         27

[*27] 149 T.C. at 175. Specifically, an insurance company with written
premiums not over $1.2 million in its tax year that makes a valid section
831(b) election is subject to tax only on its investment income (and thus
not its premium income). See I.R.C. § 831(b)(1) and (2). 11 To make a
valid section 831(b) election, a captive must be an insurance company,
however. See I.R.C. § 831(c); Syzygy, T.C. Memo. 2019-34, at *28.

      Neither the Code nor the Treasury Regulations define insurance.
See R.V.I. Guar. Co., Ltd. & Subs. v. Commissioner, 145 T.C. 209, 224
(2015); Securitas Holdings, Inc., & Subs. v. Commissioner, T.C. Memo.
2014-225, at *18. The categorization nonetheless has profound effects:
“[W]hile insurance is deductible, amounts set aside in a loss reserve as
a form of self-insurance are not.” Caylor Land, T.C. Memo. 2021-30,
at *31; see also Harper Grp., 96 T.C. at 46. When the insurer and the
insured are related (including in the case of captive or microcaptive
insurers), the line between insurance and self-insurance blurs. See
Avrahami, 149 T.C. at 176–77.

       Given the lack of a statutory definition, the meaning of insurance
“has thus been developed chiefly through a process of common-law
adjudication.” R.V.I., 145 T.C. at 224–25; see also, e.g., Caylor Land,
T.C. Memo. 2021-30, at *31. The U.S. Supreme Court long ago explained
that “[h]istorically and commonly insurance involves risk-shifting and
risk-distributing.” Helvering v. Le Gierse, 312 U.S. 531, 539 (1941).
Building on this foundation, to determine whether an arrangement
constitutes insurance, we “look[] to four nonexclusive but rarely
supplemented criteria: [1] risk-shifting; [2] risk-distribution;
[3] insurance risk; and [4] whether an arrangement looks like commonly
accepted notions of insurance.” Caylor Land, T.C. Memo. 2021-30,
at *32; see also Avrahami, 149 T.C. at 181; Rent-A-Center, Inc. v.
Commissioner, 142 T.C. 1, 13 (2014); Rsrv. Mech., T.C. Memo. 2018-86,
at *33.

      “In our [five] prior microcaptive cases, we have focused on the
elements of risk distribution and ‘commonly accepted notions of
insurance.’” Caylor Land, T.C. Memo. 2021-30, at *32; see also
Avrahami, 149 T.C. at 181–97; Keating, T.C. Memo. 2024-2, at *51–52;
Syzygy, T.C. Memo. 2019-34, at *29; Rsrv. Mech., T.C. Memo. 2018-86,

        11 For tax years after December 31, 2016, Congress raised the premium ceiling

to $2,200,000 and added certain diversification requirements to make a section 831(b)
election. See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, § 333(b),
129 Stat. 2242, 3108 (2015). These changes do not have any bearing on the years at
issue.
                                    28

[*28] at *33–34. We will do so again, and we again reach the conclusion
that the microcaptive arrangement before us does not constitute
insurance.

      B.     Risk Distribution

       Risk distribution occurs when the insurer pools a large enough
collection of unrelated risks, or risks that are “generally unaffected by
the same event or circumstance.” Rent-A-Center, 142 T.C. at 24; see also
Avrahami, 149 T.C. at 181. “The idea is based on the law of large
numbers—a statistical concept that theorizes that the average of a large
number of independent losses will be close to the expected loss.”
Avrahami, 149 T.C. at 181; see also R.V.I., 145 T.C. at 228; Securitas,
T.C. Memo. 2014-225, at *25–26. Thus, “[b]y assuming numerous
relatively small, independent risks that occur randomly over time, the
insurer smoothes out losses to match more closely its receipt of
premiums.” Rent-A-Center, 142 T.C. at 24 (quoting Clougherty Packing
Co. v. Commissioner, 811 F.2d 1297, 1300 (9th Cir. 1987), aff’g 84 T.C.
948 (1985)); see also Securitas, T.C. Memo. 2014-225, at *25–26 (“As the
size of the pool increases, the chance that the loss per policy during any
given period will deviate from the expected loss by a given amount (or
proportion) declines.” (quoting AMERCO v. Commissioner, 96 T.C. 18,
33 n.14 (1991), aff’d, 979 F.2d 162 (9th Cir. 1992))). Distributing risk
also “allows the insurer to reduce the possibility that a single costly
claim will exceed the amount taken in as a premium.” Securitas, T.C.
Memo. 2014-225, at *25 (quoting Clougherty Packing Co. v.
Commissioner, 811 F.2d at 1300).

       In analyzing risk distribution, we look to the actions of the insurer
as it is the insurer’s risk, not the insured’s, that is reduced by risk
distribution. See Rent-A-Center, 142 T.C. at 24; see also Humana Inc. v.
Commissioner, 881 F.2d 247, 251 (6th Cir. 1989), aff’g in part, rev’g and
remanding in part 88 T.C. 197 (1987); Clougherty, 811 F.2d at 1300. We
have concluded on two occasions that a captive insurer had established
risk distribution solely by insuring commonly owned brother-sister
entities.

        Each involved coverage at an impressive scale. The captive in the
first instance offered workers’ compensation, automobile, and general
liability insurance covering “between 2,623 and 3,081 stores; . . .
between 14,300 and 19,740 employees; and . . . between 7,143 and 8,027
insured vehicles,” with operations in all 50 states, the District of
Columbia, Puerto Rico, and Canada. Rent-A-Center, 142 T.C. at 24. The
                                         29

[*29] captive in the second case offered workers’ compensation,
automobile, employment practice, general, and fidelity liability
insurance to 25 to 45 separate entities in more than 20 countries with
more than 200,000 employees and 2,250 vehicles. Securitas, T.C. Memo.
2014-225, at *26.

       Microcaptive insurers have not fared as well with respect to
showing risk distribution; all of our previous cases have found
compliance with this requirement lacking. See Avrahami, 149 T.C.
at 182–90; see also Caylor Land, T.C. Memo. 2021-30, at *33–39; Syzygy,
T.C. Memo. 2019-34, at *29–37; Rsrv. Mech., T.C. Memo. 2018-86,
at *34–48. In those cases the microcaptives have attempted to
demonstrate risk distribution in two different ways: (1) direct policies to
brother-and-sister entities and (2) participation in a risk pool. See
Avrahami, 149 T.C. at 182–90; see also Caylor Land, T.C. Memo. 2021-
30, at *33–39; Syzygy, T.C. Memo. 2019-34, at *29–37; Rsrv. Mech., T.C.
Memo. 2018-86, at *34–48. The Swifts assay a similar climb and take
the same tumble.

               1.      Direct Written Policies

       The Swifts first argue that the Swift captives policies themselves
establish risk distribution. This argument appears to have been a
somewhat belated revelation, as the Swift captives’ business plans
indicate that they were participating in Jade and Emerald risk pools
(and the Pan American pool before them) for risk-distribution purposes.

       In our previous microcaptive cases, we “have focused on both the
number of insureds and the total number of independent risk exposures”
when assessing risk distribution. Rsrv. Mech., T.C. Memo. 2018-86,
at *34. In each of those cases “we found there wasn’t a large enough
pool of unrelated risk from the policies issued to the related entities.”
Caylor Land, T.C. Memo. 2021-30, at *34.

       We reach the same conclusion here. The Swift captives insured,
at most, three entities (in 2012), which dropped to two in 2013 when
Derm Docs closed its doors. 12 The Swift captives issued only nine lines
of coverage in 2012 and 2013 and six lines in 2014 and 2015. These
numbers are comparable to those we have found wanting in several of
our previous microcaptive cases. See Avrahami, 149 T.C. at 184 (finding

       12 The Commissioner argues that the Swift captives insured only one entity.

We need not address this argument because even with three insured entities, we agree
with the Commissioner’s contention that the Swift captives failed to distribute risk.
                                       30

[*30] seven types of policies to four entities fell short); Caylor Land, T.C.
Memo. 2021-30, at *19, *21, *35–37 (finding 11–12 policies concentrated
in two entities fell short); Rsrv. Mech., T.C. Memo. 2018-86, at *35–36
(between 11 and 13 policies for three entities fell short).

       Moreover, Clinic and Rehab did not insure “a sufficient number
of unrelated risks to allow the law of large numbers to predict losses.”
See Caylor Land, T.C. Memo. 2021-30, at *36; see also Rsrv. Mech., T.C.
Memo. 2018-86, at *35–36. The Swift captives’ six or nine policies
covered an operation spanning approximately 28 locations (as of 2015)
and a workforce that ranged between 530 (2012) and 341 (2015) workers
during the years at issue, including its independent-contractor
physicians. The Swift captives’ risk exposure pales in comparison with
that we have deemed satisfactory for the law of large numbers to apply.
See R.V.I., 145 T.C. at 214 (finding insurance company issued 951
policies covering 714 different insured parties with 754,532 passenger
vehicles, 2,097 real properties, and 1,387,281 commercial-equipment
assets); Rent-A-Center, 142 T.C. at 2 (finding over time, captive insured
14,300 to 19,740 employees, 7,143 to 8,027 vehicles, and 2,623 to 3,081
stores); Harper Grp., 96 T.C. at 51 (finding captive insured 7,500
customers covering more than 30,000 different shipments and 6,722
policies); cf. Caylor Land, T.C. Memo. 2021-30, at *36 (“[T]his is called
the law of large numbers—not small numbers or some numbers.”).

        The Swifts argue, however, that the law of large numbers applies
here considering the millions of doctor-patient interactions covered by
the medical malpractice tail policies. The Swifts are using the wrong
metric to evaluate the risk: Michael Angelina, the more persuasive of
the Swifts’ experts, and the Commissioner’s experts looked to the
number of doctors, which is standard in the industry when evaluating
risk. 13 Consistent with the majority of the experts, KPMG likewise
considered doctors, not patient interactions, when offering its price
estimates. We will follow their lead.

       Nor do we think the number of physicians sufficient for risk-
distribution purposes. We first disagree with the Swifts that all of the
independent-contractor physicians that worked at a Clinic location
stretching back to 1982 represented live risk exposures. During the
years at issue Texas had a two-year statute of limitations on medical

        13 Indeed, it strikes us that using the doctor-patient interaction as the

appropriate unit of measurement for risk exposure would be tantamount to treating
as the correct unit of measurement for risk exposure in the automobile insurance
context every time a car is put into gear.
                                    31

[*31] malpractice claims and a ten-year statute of repose. See Tex. Civ.
Prac. & Rem. Code Ann. § 74.251 (West 2003). Given this legal regime,
doctors who left Clinic’s service before 2002 should not be considered in
the risk-distribution analysis, leaving approximately 199 current or
former physicians. We do not believe that this is an adequate number
of risk exposures, concentrated in one line of insurance, for the operation
of the law of large numbers. In short, the captives “face[d] a number of
independent risks that are at least a couple orders of magnitude smaller
than the captives in cases where we’ve found sufficient distribution of
risk.” Caylor Land, T.C. Memo. 2021-30, at *37.

       In addition to failing to show sufficient risk exposures, we hold in
the alternative that the Swifts have not demonstrated that the Swift
captives faced independent risks, also necessary for risk distribution.
Several of the policies insured overlapping risks, as illustrated by the
seamless switch in coverage between the cost of the defense policy and
the litigation expenses policy in connection with the 2013 wrongful
termination claim. This 2013 wrongful termination claim does not
represent an isolated incident, with the Commissioner’s expert David
Russell pointing out that one event might trigger multiple policies,
including Administrative Actions, Business Income, and Litigation
Expenses.

       Moreover, “there was no geographic diversity . . . in the entities
that [the Swift captives] insured.” See id. at *38. Clinic’s locations were
concentrated in the San Antonio-Austin area, within a 100-mile radius,
particularly significant given the heavy investment in terrorism and
political violence insurance.

       Nor was there industry diversity, with both Clinic and Rehab
operating in well-defined slices of the medical field. The doctors did not
introduce such diversity even in the circumscribed context of the tail
coverage. KPMG grouped in the same risk category all of the physicians
that contracted with Clinic, assigning no value to individual claim
history, specialty, or full-time or part-time status. And Dr. Swift touted
that he tightly controlled physician practice in this setting to achieve
uniformity of performance and desirable outcomes, which belies
diversity.

       In summary, we conclude that the Swift captives failed on
multiple levels to establish risk distribution through the direct policies
in effect during the years at issue.
                                    32

[*32]         2.     Reinsurance Pools

       The Swifts argue in the alternative that the Swift captives
distributed risk by their participation in the Jade and Emerald
reinsurance pools. We are thus called to determine “whether [each]
quota-share arrangement was a true insurance arrangement for the
distribution of risk.” Rsrv. Mech. v. Commissioner, 34 F.4th at 912.

      In our previous cases we have analyzed this question by reference
to the factors used to determine whether a company is a bona fide
insurer:

        (1) whether the company was created for legitimate nontax
        reasons;

        (2) whether there was a circular flow of funds;

        (3) whether the entity faced actual and insurable risk;

        (4) whether the policies were arm’s-length contracts;

        (5) whether the entity charged actuarially determined
        premiums;

        (6) whether comparable coverage was more expensive or
        even available;

        (7) whether it was subject to regulatory control and met
        minimum statutory requirements;

        (8) whether it was adequately capitalized; and

        (9) whether it paid claims from a separately maintained
        account.

See, e.g., Reserve, T.C. Memo. 2018-86, at *38–39. To be clear, we do not
consult these factors to determine whether Jade or Emerald “meet the
formal definition of an insurance company” but to decide whether their
products constituted insurance as necessary for Castlerock and
Stonegate to distribute risk. See Rsrv. Mech. v. Commissioner, 34 F.4th
at 912. Several factors convince us that Jade’s and Emerald’s risk pools
did not suffice on this score.
                                   33

[*33]              a.     Circular Flow of Funds

       Under the reinsurance agreements, the Swift captives paid
reinsurance premiums to Jade and to Emerald to reinsure a portion of
their risk. Pursuant to trust agreements and quota share retrocession
agreements, Jade and Emerald returned to the Swift captives 99.59%
and 98.74% of the reinsurance premiums paid to Jade in 2012 and 2013,
respectively, and 94.98% and 98.99% of the reinsurance premiums paid
to Emerald in 2014 and 2015, respectively. “While not quite a complete
loop, this arrangement looks suspiciously like a circular flow of funds.”
Avrahami, 149 T.C. at 186; see also Syzygy, T.C. Memo. 2019-34,
at *30–31; Rsrv. Mech., T.C. Memo. 2018-86, at *40–41.

       The Swifts argue that under section 832(b)(4)(A), the Swift
captives never received as income the portion of Clinic’s premium
payments that were later paid to Jade and Emerald for reinsurance.
Ms. Clark refutes this argument, explaining in her annual memoranda
describing the structure of Jade and Emerald: “Your business will pay
all insurance premiums, initially to your [captives.]”

       Even assuming that Ms. Clark was incorrect, the end result was
the transfer of nearly all of the reinsurance premium amounts from
Clinic, which was 100% owned by Dr. Swift, to the Swift captives, which
were owned by trusts for the benefit of the Swifts’ adult children, with
the Swifts acting as trustees. Cf. Avrahami, 149 T.C. at 186 (“The end
result of two years in the Pan American program was the transfer of
$720,000 from an entity owned 100% by the Avrahamis to one owned
100% by Mrs. Avrahami.”); Rsrv. Mech., T.C. Memo. 2018-86, at *41.

                   b.     Arm’s-Length Contracts

       Nor do we believe that the Swift captives entered into arm’s-
length contracts with Jade and Emerald, for the same reasons that we
laid out in Reserve Mechanical, T.C. Memo. 2018-86, at *42, and
Avrahami, 149 T.C. at 188–89. Jade, and later Emerald, agreed to
reinsure a portion of the risks insured under the direct policies written
by the Swift captives, with premiums purportedly related to the specific
risks that the reinsurer assumes. At the same time, the respective
reinsurer retroceded to the Swift captives a share of the total
reinsurance premiums received from approximately 100 captives that
insured diverse companies in various lines of business.

      The fact that the premium amounts for the two different types of
insurance agreements matched belies the idea that the parties entered
                                    34

[*34] into these contracts at arm’s length. It beggars belief that for each
of the four years at issue the premiums paid to Jade and Emerald to
reinsure a portion of the Swift captives’ risk equaled the premiums paid
to the Swift captives for assuming a quota share portion of Jade and
Emerald’s blended risk from approximately 100 different captives.
See Rsrv. Mech., T.C. Memo. 2018-86, at *41–42; see also Rsrv. Mech. v.
Commissioner, 34 F.4th at 906, 912.

       Although the Swifts argue that “reinsurance premiums are
normally priced as a percentage of the original premium, this contention
is a red herring. As in Reserve Mechanical, T.C. Memo. 2018-86,
at *41–43, the Swifts failed to show why each percentage was reasonable
and why they perfectly aligned in light of the different risks being
assumed (some of which were wholly subject to client discretion). From
our perspective, it appears that the percentages were reverse engineered
by Ms. Clark and Mr. Rosenbach to ensure that the reinsurance and
retrocessions premiums both equaled at least 30% of a participating
captive’s total premiums as Ms. Clark believed necessary.

       The chance that a qualifying loss would not have been paid under
either the Jade or Emerald pool also raises questions whether a
reasonable business would enter into these contracts absent tax
motivations. See Avrahami, 149 T.C. at 188. Both were thinly
capitalized, with Jade ceding 97.5% of its premiums within the first six
months of each year in which the Swift captives participated and
Emerald releasing 95% on the same timeline in 2014. Although
Emerald slowed this cession rate in 2015, this alteration does not change
our view that the Swift captives entered into reinsurance contracts with
companies that would have difficulties making good on claims, precisely
because of the promise, i.e., the premiums would be returned, at the
heart of the arrangement. As in Avrahami, 149 T.C. at 189, Jade and
Emerald would be required to go hat in hand to the participating
captives to cover cash shortfalls, despite their inability to force any of
the participating captives to pay more money into the pool to cover the
claim.

      And we cannot ignore that the risk distribution pools actively
sought to block reinsurance coverage. As Ms. Clark explained to
Mr. Rosenbach, she had erected “meaningful deterrents to claims
against the pool.” Specifically, with respect to Coverage Part A, each
captive would need to pay up to a retained limit before making a claim
against the pool, and the pool would have the authority to exclude an
insured making excessive claims from future pools. In short, the
                                    35

[*35] contracts were set up to dissuade participants from using the pools
as reinsurance.

                    c.     Actuarially Determined Premiums

       Both Jade and Emerald charged premiums as a percentage of the
participating captives’ direct written policies, assigning different
percentages to various types and amounts of coverage. “We have held
that premiums were not actuarially determined where there has been
no evidence to support the calculation of premiums and when the
purpose of premium pricing has been to fit squarely within the limits of
section 831(b).” Syzygy, T.C. Memo. 2019-34, at *34; see also Avrahami,
149 T.C. at 196; Rsrv. Mech., T.C. Memo. 2018-86, at *43.

       We begin by observing that the Jade and the Emerald premiums
produced loss ratios that deviated significantly from the industry
standard. The loss ratio generally represents the “[p]ercentage of each
premium dollar an insurer spends on claims.” Loss Ratio, Insurance
Information Institute, https://www.iii.org/resource-center/iii-glossary/L
(last visited Dec. 7, 2023). As we have said before, “[a]s the size of the
pool increases, the chance that the loss per policy during any given
period will deviate from the expected loss by a given amount (or
proportion) declines.” Securitas, T.C. Memo. 2014-225, at *25–26;
see also Rent-A-Center, 142 T.C. at 24.

       In his report the Commissioner’s expert Dr. Russell stated that
the industry loss ratios for reinsurance companies averaged 66.1%,
56.4%, 69.6%, and 66.3% in 2012, 2013, 2014, and 2015, respectively.
Jade’s and Emerald’s loss ratios, on the other hand, ranged between
0.13% in 2012 and 7.91% in 2015. Although we do not contest the Swifts’
representation that Jade and Emerald together paid out millions of
dollars in claims, this point is of no moment when seen in the context of
the loss ratios. The tiny loss ratios suggest that the premiums were
priced much higher than what the risks called for, which calls into
question whether these were actual insurance arrangements intended
to distribute risk. See Rsrv. Mech. v. Commissioner, 34 F.4th at 912.

      Moreover, while this arrangement represents a slight variation
on the theme in Reserve Mechanical, the fundamental defects remain:
Both pools were designed to give the gloss of risk distribution, working
backwards from predetermined premiums. See id. at 906, 912. We start
with Coverage Part A. Charging a uniform reinsurance premium
percentage to all captives participating in the pool based on general lines
                                   36

[*36] of coverage and amount of underlying premium plainly fails to
account for the specific risks presented by each of the agreements being
reinsured through the pools.

       And the reinsurance premium for Coverage Part C, which
encompasses terrorism and political violence coverage, fluctuated as
necessary to achieve 30% risk distribution. Jade and Emerald agreed to
reinsure such coverage “depending on the client’s preference,” handing
Ms. Clark and Mr. Rosenbach a flexible tool to adjust the reinsurance
premiums to whatever level necessary to hit 30% risk distribution
overall. The Swift captives here provide a practical illustration, with
their Coverage Part C reinsurance premium percentages jumping from
82% in 2012 to 100% in 2013, then down to 80% in 2014 before trending
up to 85% in 2015. The (tiny) risk did not change, the percentages were
altered to fit the needs of the moment. This is unsurprising considering
that, at the beginning of these arrangements, Ms. Clark informed
Mr. Rosenbach of the plan to “add terrorism risk to the pool at whatever
split we need to get to or above 50%.”

      It was incumbent on the Swifts to show how Mr. Rosenbach
derived these premiums in light of the various risks purportedly being
reinsured. See Rsrv. Mech., T.C. Memo. 2018-86 at *43; see also Rsrv.
Mech. v. Commissioner, 34 F.4th at 906, 912. The Swifts and their
experts have failed to do so, with the evidence before us instead showing
that Ms. Clark and Mr. Rosenbach (and their helpers) were simply
manipulating numbers to design a system where 30% of total premiums
would be allocated to reinsurance before being retroceded back.

                   d.     Conclusion

       Based on the factors discussed above, we find that Jade’s and
Emerald’s policies were not bona fide insurance arrangements. See
Avrahami, 149 T.C. at 190; Syzygy, T.C. Memo. 2019-34, at *36–37;
Rsrv. Mech., T.C. Memo. 2018-86, at *47; see also Rsrv. Mech. v.
Commissioner, 34 F.4th at 911–12 (observing that the “heart of the
problem” is that the “product was not actual insurance” and the
company sponsoring the pool, “as a matter of substance, . . . did not
perform the functions of an insurance company—regardless of label—
vis-à-vis the quota share arrangement”). Accordingly, the Swift captives
could not use their reinsurance through the quota-share agreement to
achieve the risk distribution that they lacked.
                                   37

[*37] C.     Insurance in the Commonly Accepted Sense

       The absence of risk distribution alone is enough to conclude that
the arrangements between the Swift captives and their insureds were
not insurance. See Avrahami, 149 T.C. at 190–91. We also conclude, in
the alternative, that the arrangements did not constitute insurance in
the commonly accepted sense. See id. at 191; Caylor Land, T.C. Memo.
2021-30, at *39–49; Rsrv. Mech., T.C. Memo. 2018-86, at *48.

       In making this evaluation, we look at numerous factors,
“including whether the company was organized, operated, and regulated
as an insurance company; whether the insurer was adequately
capitalized; whether the policies were valid and binding; whether the
premiums were reasonable and the result of an arm’s-length
transaction; and whether claims were paid.” Avrahami, 149 T.C. at 191.
We have also considered whether “the policies covered typical insurance
risks and whether there was a legitimate business reason for acquiring
insurance from the captive.” Id.; see also Caylor Land, T.C. Memo. 2021-
30, at *40.

             1.     Organized, Operated,      and    Regulated    as   an
                    Insurance Company

       The Swift captives were incorporated in St. Kitts, subject to
regulation under its laws, and licensed to operate as insurance
companies by its Financial Services Regulatory Commission. They each
kept their own books and records, maintained separate bank accounts,
prepared financial statements, and held meetings of their boards of
directors.

       “Apart from observing these formalities, however, the facts
demonstrate that [the Swift captives were] not operated as . . . insurance
compan[ies].” See Rsrv. Mech., T.C. Memo. 2018-86, at *50; see also
Keating, T.C. Memo. 2024-2, at *53; Caylor Land, T.C. Memo. 2021-30,
at *42 (“[W]e ‘must look beyond the formalities and consider the realities
of the purported insurance transaction.’” (quoting Hosp. Corp. of Am. v.
Commissioner, T.C. Memo. 1997-482, 1997 WL 663283, at *24)).

       As an initial matter, Clinic conducted no due diligence into the
need for two microcaptive insurance companies offering these lines of
insurance. This omission would seem bizarre if these were actual
insurance companies, a point easily seen in the context of tail insurance.
For decades before setting up Castlegate, Clinic effectively addressed
risks not covered by its commercial medical malpractice policy with a
                                    38

[*38] loss-reserve fund of $500,000. In 2004 Dr. Swift began paying
more than $800,000 per year to provide similar protection as his loss
reserve. With a total of $615,000 in claims over the five years of
Castlegate’s existence, we struggle to see the business reason for one
microcaptive insurance company, much less a second. As to the other
lines, Dr. Swift plainly communicated that he wanted to add coverage
in the hopes of “maxing out” premiums, not for any real business need.
That does not strike us as how the insurance industry normally
operates. See Keating, T.C. Memo. 2024-2, at *60 (“A much more detailed
explanation of the need for such expensive policies was warranted than
the ones provided by [the taxpayer].”).

       The Swift captives “also made investment choices only an
unthinking insurance company would make.” See Avrahami, 149 T.C.
at 193. Specifically, the Swift captives invested millions of dollars in
premiums in a real estate limited partnership that owned and developed
three of Clinic’s urgent care facilities, among other real estate projects.
The Swift captives’ holdings were so illiquid that Dr. Swift issued a put
option to both in June 2013 that, if needed, required him to purchase
either or both captives’ entire interests in the limited partnership at a
price determined by an appraisal process. Most of the premiums not
tied up in real estate were invested in the stock market through
brokerage accounts. Like the Swifts’ own expert, Mr. Angelina, “[w]e do
not think that an insurance company in the commonly accepted sense
would invest” so heavily in assets that could not be accessed to pay
claims. Avrahami, 149 T.C. at 193; Syzygy, T.C. Memo. 2019-34, at *40;
Avrahami, 149 T.C. at 193.

       The handling of claims also seems off. Only three claims were
made under 30 lines of insurance during the four years at issue, with
one of them relating to the audit that resulted in this litigation. Despite
stern warnings regarding notification periods, all three claims were
approved despite being filed months after the expiration of the relevant
periods. We find unusual the idea (articulated by one of Ms. Clark’s
team members) that Dr. Swift did not need to consult with the captive
before finalizing the settlement of one of the claims and that Heritor
would provide “a letter approving coverage for the future settlement.”
See also Keating, T.C. Memo. 2024-2, at *63 (“[The captives] paid claims.
Nonetheless, the process by which those claims were handled was
abnormal.”).

     The policies also displayed various oddities. The provision for
payment by promissory note if Clinic “suffer[ed] a series of catastrophic
                                     39

[*39] loss occurrences that [might] impair [Clinic’s] solvency” would
hamper Clinic’s recovery from a serious loss. Most of the policies deviate
from industry standard by not providing a refund of unearned premiums
in the event of cancellation and by tying cancellation to Clinic’s
insolvency. And the General Cost of Defense policy featured combined
premiums of $14,000, which exceeded the per-claim and aggregate limit
of $10,000 for 2012, and nearly did the same in 2013 (limits set at
$15,000). As the Commissioner’s expert Donald Bendure opined in his
report, “[t]his policy is in effect a deposit account for legal fees with a
limit so low as to be of minimal use from a risk management standpoint.”

      Although the Swift captives were organized and regulated as
insurance companies, they were not operated as such.

             2.     Adequate Capitalization

       A captive is adequately capitalized as long as it meets the
minimum capitalization requirements of its regulators. See Avrahami,
149 T.C. at 193; R.V.I., 145 T.C. at 231; Harper Grp., 96 T.C. at 50, 60;
Syzygy, T.C. Memo. 2019-34, at *41. Although the Swift captives were
thinly capitalized, they complied with St. Kitts law.

             3.     Valid and Binding Policies

       “To be valid and binding an insurance policy should, at a
minimum, identify the insured, define an effective period for the policy,
specify what is covered by the policy, state the premium amount, and be
signed by authorized representatives of the parties.” Rsrv. Mech., T.C.
Memo. 2018-86, at *54; see also Avrahami, 149 T.C. at 194; R.V.I., 145
T.C. at 231. Here, the parties do not dispute that the policies issued by
the Swift captives identified the insured, stated the premium amount,
and were signed by Heritor as the authorized insurance manager.

       The Commissioner argues, however, that the policies contain
conflicting terms, pointing to the exact phrasing we critiqued in
Avrahami, 149 T.C. at 194. We note that this is hardly the only example
of questionable draftsmanship, with several of the policies acting
effectively as excess coverage masquerading as primary. We have
previously decided that this factor weighed against a taxpayer where
policies combined ambiguities and contradictions with late issuance of
the policies. Syzygy, T.C. Memo. 2019-34, at *42. The problems with
these policies strike us as venial, not mortal, and we will treat this factor
as neutral.
                                     40

[*40]        4.     Reasonableness of Premiums

      We next consider whether the Swift captives’ premiums were
reasonable and the result of an arm’s-length transaction. See, e.g.,
Avrahami, 149 T.C. 194–95.

       As a general matter, we have serious reservations about the
reasonableness of premiums developed to hit a preordained target for
tax purposes, as here. See Caylor Land, T.C. Memo. 2021-30, at *45–46;
Syzygy, T.C. Memo. 2019-34, at *34; see also Keating, T.C. Memo. 2024-
2, at *59 (finding premiums to be unreasonable where the client
“provided . . . an amount he was willing to pay or a target premium for
all policies,” which “played an outsized role in . . . underwriting”). “It is
fair to assume that a purchaser of insurance would want the most
coverage for the lowest premiums[, and that] [i]n an arm’s-length
negotiation, an insurance purchaser would want to negotiate lower
premiums instead of higher premiums.” Syzygy, T.C. Memo. 2019-34,
at *33–34; see also Keating, T.C. Memo. 2024-2, at *59. “Seemingly, the
main advantage of paying higher premiums is to increase deductions.”
Syzygy, T.C. Memo. 2019-34, at *34. “We have held that premiums were
not actuarially determined when there has been no evidence to support
the calculation of premiums and when the purpose of premium pricing
has been to fit squarely within the limits of section 831(b).” Id.

      In these cases, Dr. Swift had a long history of playing the
microcaptive insurance version of the “Showcase Showdown” from the
Price Is Right: obtaining premiums close to, but not over, the limit
imposed by section 831(b) or a pre-set target. The voluminous record
before us leaves the firm impression that premium amounts were
engineered to suit the tax needs of the moment, not to account for any
risk.

                    a.     Malpractice Tail Coverage

       Looking at the derivation of the premiums more closely confirms
us in our view. We begin, as did Dr. Swift, with tail coverage. Again,
this coverage seemed an unusual choice in 2004 given (1) little loss
history, (2) a practice unlikely to produce considerable tail risk,
(3) proactive measures to further minimize risk, and (4) a moderate
reserve that had proved itself fully up to the task of meeting losses that
had arisen. By the years at issue Clinic had spent over $4,600,000 for
such coverage, while paying out less than $400,000 in claims. See
Keating, T.C. Memo. 2024-2, at *63. We believe that, if this were
                                       41

[*41] intended to be insurance, Dr. Swift would have stopped paying
premiums at this level long before the years at issue.

       Also counting against the reasonableness of the premiums was
the design of the coverage during the years at issue. The tail policy had
a per-occurrence limit of $300,000 and an aggregate limit of $6 million
despite a total of 42 medical malpractice claims from 1982 through 2015.
Only four of those claims exceeded $300,000, lending support to the
notion that the limits were set unreasonably high to further goose
premiums for a coverage that “no carrier will write.” 14

        The rate on line, which measures insurance cost per unit by
dividing the premium paid by the occurrence limit, casts further doubt
on the reasonableness of these premiums. “A higher rate-on-line means
that insurance coverage is more expensive per dollar of coverage,” which
“leads to a greater deduction for premiums.” See Syzygy, T.C. Memo.
2019-34, at *31. For the years at issue the commercial medical
malpractice policies purchased by Clinic had a rate on line of 9.299%
with respect to the occurrence limits and 3.1% with respect to the
aggregate limit. The captives on the other hand had a rate on line of
233.12% on the occurrence limits and 11.656% in the aggregate basis.
See Keating, T.C. Memo. 2024-2, at *61 (finding premiums to be
“patently unreasonable” when “the average rate-on-line for . . . captive
policies during the years at issue was more than ten times greater than
the average rate-on-line for comparable commercial insurance policies”).

       KPMG’s premium estimate analyses fail to change our mind.
These estimates rely on general industry and internal KPMG data to
derive a pure premium, which was then adjusted for various factors
including the expense load. At trial, however, Dr. Swift and the KPMG
representative who testified struggled to explain these calculations and
the data relied upon. We have particular concerns considering the
strong likelihood that the underlying data used to derive the premiums
involved entities in the health care field, but in different states and with
different risk factors and practices.

     The Commissioner’s experts (Evelyn Toni Mulder and Daniel
Lupton) showed numerous weaknesses in the KPMG analyses, which

       14 We also bear in mind the contrast between the tail premium and the

commercial malpractice premiums that Clinic paid during the years at issue. Clinic
paid approximately $700,000 per year for its tail coverage and $44,763 for its
commercial medical malpractice coverage, which featured no deductible, a $500,000
occurrence limit, and a $1.5 million aggregate limit.
                                   42

[*42] suggested that the premiums had been significantly overstated.
Among other things, the KPMG analyses during the years at issue
(1) inexplicably excluded low loss years from the calculation of pure
premiums, (2) failed to tailor general industry data regarding loss
reporting to reflect the significantly shorter lag time experienced by
urgent care centers such as Clinic, and (3) did not accurately account for
differences in risk associated with full- and part-time physicians.

      In making our determination, “we consider more than whether
the premiums chosen can be arrived at by actuarial means.” Rsrv.
Mech., T.C. Memo. 2018-86, at *60. “Without a comprehensible
explanation we can’t find these premium amounts justified.” Avrahami,
149 T.C. at 196. The Swifts have failed to demonstrate that the data
used by KPMG accurately reflected risks Clinic faced or resulted in
reasonable and actuarially determined premiums.

                    b.    Nonmedical Malpractice Coverage

       We reach the same conclusion with respect to the nonmedical
malpractice lines of insurance, which were part of Dr. Swift’s avowed
effort “to get closer to maxing out the premiums” to the Swift captives.
During the years at issue Clinic paid an average of $73,968 in premiums
to maintain their longstanding, expansive lines of commercial
insurance. At the same time, Clinic paid the Swift captives an average
of $794,500 for various niche lines of insurance, many of which were
excessive. As documented by Dr. Russell, the annual rates-on-line for
the Swift captives’ policies were 50 (or more) times greater than the
commercial policies for the same period.

        The premium analyses of Mr. Rosenbach, who did not testify at
trial, fail to persuade us that these astounding numbers are reasonable.
From the record before us we understand that, aside from the terrorism
and political violence lines, Mr. Rosenbach generally relied on a 2005
filing by the Chubb Group of Insurance Companies (Chubb) with the
Florida Department of Financial Services to determine a base rate for
most of the lines of insurance, which he then adjusted to take into
account various factors that he found relevant.

      Neither the Swifts nor their experts have provided a persuasive
explanation as to how Mr. Rosenbach exercised his judgment to
                                        43

[*43] determine the base rates, factors, and ultimately, the premiums. 15
See Avrahami, 149 T.C. at 195 (“Rosenbach also made adjustments
based on his professional judgment—most without a coherent
explanation.”). Absent such explanation, we are left with the impression
left by Mr. Rosenbach’s emails with Ms. Clark and her team, i.e., that
he reverse-engineered premiums with a patina of actuarial methods.
Keating, T.C. Memo. 2024-2, at *60 (“The premiums were . . . inflated by
numerous subjective, judgment-driven factors, each of which could
modify the premiums significantly; and there is very little
documentation to support how [these factors were applied].”).

       The premiums for terrorism and political violence insurance
likewise were not reasonable. This coverage supplemented Clinic’s
terrorism coverage under its commercial policies, which cost nothing
and covered the replacement cost of Clinic’s buildings and equipment
(valued between $33 million and $45 million) among other things. The
Swift captives’ terrorism and political violence coverage operated as
excess coverage of $6,750,000, except in narrow conditions not covered
by the commercial insurance such as a nuclear, biological, or chemical
attack in a city with a population of less than 2 million people. For such
coverage, the Swift captives charged premiums of $540,000, $231,000,
$384,000, and $384,000 for 2012 through 2015, respectively.

       The Commissioner’s experts persuasively demonstrate that
similar commercial coverage would be a fraction of the premium
charged. Dr. Russell explained that the Swift captives’ terrorism
insurance premiums were approximately 1,400 times the highest
commercial rates. Ms. Taylor and Mr. Lupton agreed, explaining that a
high-end estimate for coverage for the years at issue would be $5,430
rather than the $1.5 million paid by Clinic. The record before us
demonstrates that the premiums for this coverage were not reasonable
but merely a mechanism so that the Swift captives could hit the risk-
distribution target set by Ms. Clark.

        In summary, we agree with Dr. Russell’s observation that “[w]hile
it is not unlikely for an insured to file few or no claims over an extended
period, it is not economically justifiable that the Swift entities would

        15 Even in the isolated instances where there was a thin ligament connecting

Mr. Rosenbach’s work to the Chubb filing, the end result was shaky. For example, he
changed the deductible factor from year to year even though the deductibles for the
policies remained constant. And he failed to take into account differences between
Chubb and the Swift captives when determining expenses, which obviously would be
quite stark.
                                    44

[*44] rationally continue to pay premiums at the levels Castlerock and
Stonegate . . . charged.” The premiums were neither reasonable nor
actuarially determined. This factor thus weighs against the Swift
captives’ being insurance in the commonly accepted sense.

             5.     Payment of Claims

      Clinic submitted three claims to the Swift captives during the
years at issue. The Swift captives paid these three claims, but as
discussed above, there were problems with the way they were handled.
While this factor weighs slightly in favor of the Swifts, “we do not regard
this as overwhelming evidence that the arrangement constituted
insurance in the commonly accepted sense.” See Syzygy, T.C. Memo.
2019-34, at *45; see also Rsrv. Mech., T.C. Memo. 2018-86, at *61.

             6.     Conclusion

       Although the Swift captives displayed some attributes of
insurance companies, they failed to operate as insurance companies and
their premiums were nonsense. We therefore conclude that the Swift
captives did not provide insurance in the commonly accepted sense.

             7.     Effect on the Swift Captives

       Our holding in this regard has two major consequences. First,
because the Swift captives’ policies were not contracts for insurance,
they do not fall within the meaning of insurance company in
section 831(c), which is defined in section 816(a) as “any company more
than half of the business of which during the taxable year is the issuing
of insurance or annuity contracts or the reinsuring of risks underwritten
by insurance companies.” This makes the Swift captives ineligible to
make an election under section 831(b) for the tax years at issue.
Likewise, the Swift captives must meet this definition of “insurance
company” to elect to be treated as domestic corporations under section
953(d)(1)(B). See also Avrahami, 149 T.C. at 198. Therefore, the Swift
captives’ section 953(d) election is likewise invalid for the tax years at
issue. We sustain the Commissioner’s determinations with respect to
the Swift captives, so the Swift captives must recognize the premiums
they received as income for the years at issue.

             8.     Effect on the Swifts

      The second major consequence is that, if Clinic’s payments are not
for insurance, “then they are not ordinary and necessary business
                                   45

[*45] expenses and may not be deducted under section 162(a).” See
Avrahami, 149 T.C. at 199; see also Syzygy, T.C. Memo. 2019-34, at *46.
We therefore sustain the Commissioner’s determination to adjust the
Swifts’ income by disallowing these deductions.

III.   Legal Expense Deductions

      In the notices of deficiency, the Commissioner also disallowed
deductions for certain legal and professional fees paid to Ms. Clark,
which were claimed on Clinic’s Schedules C. The Swifts assert in a
conclusory statement in their brief that these were ordinary and
necessary business expenses because Ms. Clark’s firm “provided
valuable legal services during the years at issue by advising Dr. Swift
regarding the proper formation and operation of . . . section 831(b)
insurance companies.” The Swifts fail to develop this argument and
have forfeited this issue. See, e.g., Estate of Spizzirri v. Commissioner,
T.C. Memo. 2023-25, at *17 n.9.

       Even if we were to overlook this forfeiture, the Swifts would not
prevail on this point. The deductibility of legal expenses under
section 162(a) depends on the origin and character of the claim for which
the expenses were incurred and whether the claim bears a sufficient
nexus to the taxpayer’s business or income-producing activities. See
United States v. Gilmore, 372 U.S. 39, 48–49 (1963); Mylan, Inc. & Subs.
v. Commissioner, 156 T.C. 137, 152 (2021), aff’d, 76 F.4th 230 (3d Cir.
2023). For these legal fees to be deductible, “the origin of those legal
services must have been rooted in [their] Schedule C business.” Test v.
Commissioner, T.C. Memo. 2000-362, 2000 WL 1738858, at *4. The
legal fees in our cases related to the formation and operation of wholly
independent business entities, i.e., the Swift captives, and the Swifts
have failed to establish that the payment of microcaptive formation and
operation expenses bears a sufficient nexus to Clinic’s business of
providing urgent care and occupational medicine services.

      We therefore find the Commissioner correctly disallowed the legal
expense deductions the Swifts claimed in the years at issue.

IV.    Penalties

      In each of the notices of deficiency, the Commissioner determined
a 20% accuracy-related penalty against the Swifts, premised on an
underpayment attributable to negligence and a substantial
understatement of income tax. See I.R.C. § 6662(a) and (b)(1) and (2).
                                    46

[*46] Section 7491(c) generally provides that “the Secretary shall have
the burden of production in any court proceeding with respect to the
liability of any individual for any penalty.” This burden requires the
Commissioner to come forward with sufficient evidence indicating that
the imposition of the penalty is appropriate.            See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once he meets his burden of
production, the burden of proof is on the taxpayer to “come forward with
evidence sufficient to persuade a Court that the Commissioner’s
determination is incorrect.” Id. at 447.

      A.     Supervisory Approval Requirement

       The Commissioner’s burden of production under section 7491(c)
includes establishing compliance with section 6751(b)(1), which provides
that “[n]o penalty . . . shall be assessed unless the initial determination
of such assessment is personally approved (in writing) by the immediate
supervisor of the individual making such determination.” See Graev v.
Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling
in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d 190,
217, 221–22 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-
42. In Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14–15 (2020), we
explained that the “initial determination” of a penalty assessment is
typically embodied in a letter “by which the IRS formally notifie[s] [the
taxpayer] that [it] ha[s] completed its work and . . . ha[s] made a definite
decision to assert penalties.” Once the Commissioner introduces
evidence sufficient to show written supervisory approval, the burden
shifts to the taxpayer to show that the approval was untimely, viz, “that
there was a formal communication of the penalty [to the taxpayer] before
the proffered approval” was secured. Frost v. Commissioner, 154 T.C.
23, 35 (2020); Thompson v. Commissioner, T.C. Memo. 2022-80, at *6.

      “The word ‘determination’ has ‘an established meaning in the tax
context and denotes a communication with a high degree of concreteness
and formality.” Oxbow Bend, LLC v. Commissioner, T.C. Memo. 2022-
23, at *5 (quoting Belair Woods, 154 T.C. at 15); accord Beland v.
Commissioner, 156 T.C. 80, 85 (2021). “[T]he ‘initial determination’ of a
penalty assessment will be embodied in a formal written communication
to the taxpayer, notifying him that the Examination Division has
completed its work and has made a definite decision to assert penalties.”
Belair Woods, 154 T.C. at 10. A “mere suggestion, proposal, or initial
informal mention” of penalties does not, we have held, constitute an
                                          47

[*47] initial determination under section 6751(b)(1). Tribune Media Co.
v. Commissioner, T.C. Memo. 2020-2, at *19. 16

        The Swifts make two arguments regarding supervisory approval.
First, they argue that the Commissioner did not establish that the group
managers who signed the penalty approval forms were the respective
examining agents’ immediate supervisors. “We have repeatedly held
that a manager’s signature on a penalty approval form, without more,
is sufficient to satisfy the statutory requirements [of section 6751].”
Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *11.

       The Swifts also raise the vague contention that “there are
instances where the revenue agent indicated penalties to petitioners,
but had not yet sought managerial approval.” We understand that the
Swifts are challenging the supervisory approval of the 2012 and 2013
penalties on the ground that Revenue Agent Sohrt sent a letter with a
revenue agent report “includ[ing] the 20% accuracy related penalty” on
December 31, 2015, before obtaining his supervisor’s written approval
on January 4, 2016. We do not believe that this communication
possessed the high degree of concreteness and formality that we
associate with a determination for purposes of section 6751. The letter
enclosing the revenue agent report noted that the revenue agent was
“recommending a disallowance of the applicable captive premium
payments,” but made clear that no final decision had been made:

        Because the statute of limitations will be expiring [in four
        months], it will be necessary to move the case forward for
        the possible issuance of a Statutory Notice of Deficiency.

        16 We recognize that there is a split among circuits as to whether written

supervisory approval must be obtained before the IRS issues a notice of deficiency,
Chai v. Commissioner, 851 F.3d at 221, or merely before the assessment, Kroner v.
Commissioner, 48 F.4th 1272, 1278–79 (11th Cir. 2022), rev’g in part T.C. Memo. 2020-
73; see also Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066,
1074 (9th Cir. 2022) (holding that section 6751(b)(1) “requires written supervisory
approval before the assessment of the penalty or, if earlier, before the relevant
supervisor loses discretion whether to approve the penalty assessment”), rev’g and
remanding 154 T.C. 68 (2020).
        As stated previously, appeal of these cases would presumably lie in the Fifth
Circuit. I.R.C. § 7482(b)(1)(A); Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445
F.2d 985 (10th Cir. 1971). Golsen stands for the proposition that this Court will apply
the decision of the court of appeals that is “squarely in point where appeal from our
decision lies to that Court of Appeals and to that court alone” and, as a corollary, that
this Court’s own views will be given effect to the extent the relevant court of appeals
has not expressed one. See Golsen, 54 T.C. at 757. The Fifth Circuit does not appear
to have taken a clear stance on the section 6751(b)(1) issue.
                                          48

[*48] Internal Revenue Service District Counsel will review the
      issue and will make a determination as to whether a
      Statutory Notice of Deficiency will be issued.

We accordingly conclude that this was not an initial determination for
purposes of section 6751.

       B.      Section 6662

       The Code imposes a 20% penalty on the portion of the
underpayment of tax attributable to a substantial understatement of
income tax. 17 See I.R.C. § 6662(a), (b)(2). An understatement of income
tax is substantial if it exceeds the greater of $5,000 or “10 percent of the
tax required to be shown on the return.” I.R.C. § 6662(d)(1)(A). The
Commissioner has met his prima facie burden, as each of the
understatements at issue plainly exceeds $5,000 and is greater than
10% of the tax required to be shown on the return:

      Year   Reported Tax Liability   Corrected Tax Liability   Understatement

      2012         $1,520,783                  $2,414,592           $893,809

      2013          1,106,436                   1,703,291            596,855

      2014          2,046,545                   2,540,804            494,259

      2015          1,484,612                   1,946,136            461,524

      The accuracy-related penalty does not apply to any part of an
underpayment of tax if it is shown that the taxpayer acted with
reasonable cause and in good faith with respect to that portion. I.R.C.
§ 6664(c)(1); Rogers v. Commissioner, T.C. Memo. 2019-61, at *31, aff’d,
9 F.4th 576 (7th Cir. 2021). The Swifts bear the burden of proving that
they had reasonable cause and acted in good faith with respect to the
underpayments. See Higbee, 116 T.C. at 449.

         17 “Only one accuracy-related penalty may be applied with respect to any given

portion of an underpayment, even if that portion is subject to the penalty on more than
one of the grounds set forth in section 6662(b).” Sampson v. Commissioner, T.C. Memo.
2013-212, at *7–8 (citing New Phoenix Sunrise Corp. & Subs. v. Commissioner, 132
T.C. 161, 187 (2009), aff’d, 408 F. App’x 908 (6th Cir. 2010)). Consequently, we will
not determine whether the Swifts are liable for penalties for negligence.
                                         49

[*49] “Reasonable cause requires that the taxpayer have exercised
ordinary business care and prudence as to the disputed item.”
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d,
299 F.3d 221 (3d Cir. 2002). The determination of whether a taxpayer
acted in good faith is made on a case-by-case basis, considering all the
pertinent facts and circumstances. Treas. Reg. § 1.6664-4(b)(1).
“A taxpayer’s knowledge, education, and experience are relevant factors
to indicate reasonable cause and good faith.” Rogers, T.C. Memo. 2019-
61, at *31. For underpayments related to passthrough items we look at
all pertinent facts and circumstances, including the taxpayer’s own
actions, as well as the actions of the passthrough entity. See Treas. Reg.
§ 1.6664-4(e).

       Reliance on a tax professional may constitute reasonable cause if
that professional advises the taxpayer on a substantive tax issue. See
United States v. Boyle, 469 U.S. 241, 250–51 (1985); Treas. Reg.
§ 1.6664-4(b). For the reliance to be reasonable, a taxpayer must prove
that “(1) [t]he adviser was a competent professional who had sufficient
expertise to justify reliance, (2) the taxpayer provided necessary and
accurate information to the adviser, and (3) the taxpayer actually relied
in good faith on the adviser’s judgment.” Neonatology, 115 T.C. at 99.

       The Swifts argue that they had reasonable cause for their
reporting positions because they reasonably relied on the advice of
Ms. Clark and their CPA, Mr. Schultz, at a time when the law
surrounding microcaptive insurance companies was novel. Ms. Clark
was the primary promoter of the transaction, however, so the Swifts
could not reasonably rely on any advice she offered. See, e.g., Avrahami,
149 T.C. at 206; 106 Ltd. v. Commissioner, 136 T.C. 67, 79 (2011), aff’d,
684 F.3d 84 (D.C. Cir. 2012).

      Neither could the Swifts rely on the advice of Mr. Schultz, who
had been involved with Dr. Swift’s microcaptive insurance scheme since
2004 and who “participated in structuring the transaction.” 106 Ltd.,
136 T.C. at 79 (quoting Tigers Eye Trading, LLC v. Commissioner, T.C.
Memo. 2009-121, 2009 WL 1475159, at *19). Even if Mr. Schultz
avoided the promoter label, the Swifts fail to establish the content of any
substantive tax advice provided by Mr. Schultz on which they relied. 18

         18 The Swifts also argue that their penalties should be reduced because they

relied on “substantial authority” in accordance with Treasury Regulation § 1.6662-
4(d)(3). The Swifts, however, did not raise this argument until their answering brief,
and we thus decline to consider it. See, e.g., Clay v. Commissioner, 152 T.C. 223, 236
                                         50

[*50] While the Swifts insist that Mr. Schultz was “very involved” and
“asked many insightful and thorough questions . . . in the form of
detailed correspondence,” these questions do not constitute advice nor
do they indicate to the Court any advice Mr. Schultz ultimately relayed
to the Swifts, upon which they supposedly relied.

V.     Conclusion

       For the reasons set forth above, we will sustain the deficiency
determinations by the IRS. We further find that the Swifts are liable
for the alternative 20% accuracy-related penalties under section 6662.

       To reflect the foregoing,

       Appropriate decisions will be entered.

(2019) (deeming “an issue raised for the first time in a party’s answering brief to be
abandoned and conceded”).