Penalty.
We left off the story of microcaptive promoter Celia Clark with the article Former Microcaptive Promoter Sues IRS After Being Assessed With $11 Million In Section 6700 Penalties (Dec. 11, 2021). As related in that article, the IRS assessed Clark with $11 million in penalties, Clark paid a little over $1.7 million in penalties, and then Clark filed a refund lawsuit against the IRS in the U.S. District Court for the Southern District of Florida.
We now come to the end of that case, as the IRS and Clark have settled and Clark has fully paid the settlement. This information is public knowledge as found in the Joint Notice of Settlement, the Order Granting Judgment and finally the Satisfaction of Judgment.
In summary, the Order states that the IRS was awarded a judgment on its counterclaim against Clark in the amount of over $11.6 million. The case settled with Clark paying $5.2 million, which is slightly less than half of what the IRS sought but still a painful amount. I would guess, without knowing, that the amount of this settlement was probably driven more by what Clark was able to pay rather than the issues in the case. On the other hand, another microcaptive promoter had just a couple of weeks before won a jury trial against the IRS in a similar situation, albeit the promoter in that case was much lower profile than Clark and that promoter had not been involved with any microcaptive clients who had lost a case before the U.S. Tax Court, see Captive Manager Avoids 6700 Penalties After Jury Trial (April 13, 2024). With the stakes being so large, neither side was willing to throw the die and this settlement resulted.
This result was probably also driven by the fact that Clark did some smart risk management for herself. After the Avrahami case was decided in favor of the IRS before the U.S. Tax Court, Clark immediately closed her law firm and captive operations and apparently retired. Also, and unlike some others involved in microcaptives, I can't recall any allegations of Clark doing really egregious things like backdating policy documents. This seemed to be more an instance of Clark believing that she was correct in her interpretation of the tax law when in reality she was ultimately determined to be just terribly wrong.
Compare this with so many of the microcaptive promoters who blissfully continued to market and sell microcaptives long after the Avrahami decision and even after the U.S. Tenth Circuit Court of Appeals blistered microcaptives in the Reserve Mechanical decision. These promoters knew they were in the wrong, yet they persisted because the money was so good. Good luck to these folks getting anything like a good settlement when their own time comes.
Believe it or not, there are still a few microcaptive promoters out there who are still selling these things, mostly "cell captives" organized as series LLCs. I know, because once in while somebody who has been pitched one of these deals will ask me to review what somebody is trying to sell to them. The promoters simply disparage all the U.S. Tax Court (and 10th Circuit) losses as being from inferior-quality programs, thus suggesting that their own bag of manure doesn't smell so bad. Why these folks still haven't been shut down is a great mystery to me.
Anyway, Clark was nothing like the worst promoter of microcaptives and at least she finally saw the writing on the wall when the Avrahami opinion was issued. Her chapter in the story of microcaptives has now closed, but be assured there will be some interesting chapters on other promoters yet to come.
