Blog · 14 October 2026

Accuracy-Related Penalties After Clear Sky: Micro-Captives, §6662 and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Accuracy-related penalties under IRC §6662 are how the IRS turns a micro-captive underpayment into a 20%—or, if disclosure was inadequate, 40%—addition to tax. In Jones / Clear Sky Insurance Co. v. Commissioner, T.C. Memo. 2026-99 (September 29, 2026; Judge Joseph W. Nega), the Tax Court sustained those penalties after earlier opinions held that Clear Sky Insurance Co., Inc. (CSI) did not provide insurance for federal income tax purposes. For US CPA firms, Clear Sky is a practical briefing on economic substance under §7701(o), the 40% nondisclosure enhancement under §6662(i), and a constructive-dividend negligence penalty for 2016.

What Clear Sky and the Jones opinions held

Sani-Tech West, Inc. (STW), an S corporation in Camarillo, California, paid premiums to related captive CSI. Per Captive.com (October 5, 2026) and Bloomberg Tax (September 29, 2026) reporting of the Jones line of cases, the court previously held that CSI did not provide insurance for federal income tax purposes, that the premiums were not arm’s-length, and that CSI must recognize $781,977 received in 2015 (reported as unearned premiums) as income for 2015 (Jones II, T.C. Memo. 2025-78; Bloomberg describes the figure as about $780,000). T.C. Memo. 2026-99 is the penalty opinion that follows Jones I (T.C. Memo. 2025-25) and Jones II.

For 2015, the court held that the captive transaction lacked economic substance under IRC §7701(o): there was no meaningful change in the taxpayers’ economic position, and no substantial non-tax purpose was established. Midpage and Tax Notes extracts of Jones I describe a circular flow of premiums among related entities—STW → CSI → the OMNI reinsurance pool → back to CSI. Captive coverage was 48–63 times as expensive as STW’s Hartford commercial insurance, and STW submitted no claims to CSI despite 16 different policy coverages. Per Tax Notes / Athena extracts of Jones I, CSI paid an OMNI reinsurance premium of $409,693 on December 31, 2015 (50.38% of the premiums CSI charged STW); a retrocession premium returned days later (January 4, 2016), less trust deposit and fees.

Accuracy-related penalties: 20% vs 40%

Under IRC §6662, the accuracy-related penalty is generally 20% of the underpayment. Relevant bases include negligence or disregard of rules or regulations (§6662(b)(1)), substantial understatement of income tax (§6662(b)(2)), and underpayments attributable to transactions lacking economic substance (§6662(b)(6)). When a noneconomic-substance underpayment is not adequately disclosed on the return or an attached statement, §6662(i) raises the rate to 40%.

In T.C. Memo. 2026-99, the court sustained the 40% enhanced penalty against petitioners other than CSI for 2015 because disclosure was inadequate. CSI received the unenhanced 20% rate after an IRS concession. Covered.md’s lesson on this case states carefully that a reasonable-cause / good-faith defense is generally available under §6664(c) but not for noneconomic-substance penalties—confirm that framing against current Code and regulations before advising a particular client.

For 2016, a $400,000 payment from CSI to Richard Shor had previously been held a constructive dividend (not a bona fide loan). The Shors were held liable for a 20% accuracy-related penalty based on negligence or disregard of rules or regulations for that year.

What US CPA firms should tell clients

• Price and circularity are facts the court will use. Coverage that costs dozens of times commercial insurance, zero claims across many policy lines, and premiums that loop through a related reinsurance pool are the kind of facts that feed both the insurance analysis and the §7701(o) economic-substance analysis.
• Disclosure is not optional window dressing for §6662(b)(6). Inadequate disclosure of a noneconomic-substance transaction can move the rate from 20% to 40% under §6662(i). If a return position depends on a micro-captive or similar structure, document what was disclosed on the return or attached statement—and what was not.
• “Loan” labels do not defeat constructive-dividend treatment. The 2016 $400,000 CSI-to-Shor payment sustained as a constructive dividend, with a 20% negligence-based accuracy-related penalty, is a reminder to test related-party cash movements against substance, not just the label on the journal entry.
• Promotion and preparer risk travel with the client. Abusive or poorly documented arrangements often surface later as both client underpayments and preparer-responsibility questions. For related preparer-duty framing, see our ghost preparers and preparer responsibility lessons and the IRS warning in fake Tribal Tax Credits (IR-2026-112).
• When underpayments become balances due, plan collection early. Accuracy-related additions stack on tax and interest. For payment plans, offers in compromise and Automatic Exemption from Penalty context (noting AEP does not cover accuracy-related penalties), see our IRS collection alternatives guide.

A short firm checklist

• Inventory clients with related captive, micro-captive or §831(b)-style arrangements and calendar the Jones / Clear Sky opinions for internal briefing—not as client marketing.
• Compare captive premium cost and claims history to commercial coverage the operating company already buys; document the comparison.
• Review return attachments and Form 8275 / 8275-R (or other disclosure) history before asserting that a noneconomic-substance position was “adequately disclosed.”
• Trace related-party “loans,” premium refunds and reinsurance retrocessions for constructive-dividend and circular-flow risk.
• Separate economic-substance penalty analysis (§6662(b)(6)/(i), limited §6664(c) relief) from ordinary negligence / substantial-understatement analysis when scoping controversy work.

Where this fits for Tax Brew readers

Micro-captive and related-party controversy work sits at the intersection of return positions, disclosure and controversy support. If your firm needs capacity on transcript pulls, workpaper assembly or notice response while signing professionals own the judgment calls, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Check current guidance: this article summarizes reporting of Jones / Clear Sky Insurance Co. v. Commissioner, T.C. Memo. 2026-99 (September 29, 2026; Judge Joseph W. Nega), and prior Jones I (T.C. Memo. 2025-25) and Jones II (T.C. Memo. 2025-78) holdings as described in Captive.com (October 5, 2026), Bloomberg Tax (September 29, 2026), and midpage/Tax Notes / Athena extracts of the opinions, together with IRC §§6662(a)/(b)(1)/(b)(2)/(b)(6)/(i), 6664(c) and 7701(o). Confirm the full opinions and current Code/regulations before advising. This is general information, not tax or legal advice. Sources as of 14 October 2026.