Case Law History

Helvering v. LeGierse (1941)
Established the principle that both risk shifting and risk distribution are requirements for a contract to be treated as insurance.

Crawford Fitting Co. v. U.S. (1985)
Insurance premiums paid to a Captive by a group of separate corporations that were owned and controlled by a group of related individuals were deductible. The shareholders of the captive were not so economically related that their transactions had to be aggregated and treated as the transactions of a single taxpayer.

Humana, Inc. v. Com’r (1989)
Held that the brother-sister captive arrangement constituted insurance and premium payments of the captive’s brother-sister entities (but not its parent) were deductible.

Ocean Drilling & Exploration Company (1991)
Deduction allowed for premiums paid to a Captive that was a wholly owned subsidiary based on the following facts: 1) The insured faced recognized hazards. 2) Insurance contracts were written and premiums paid. 3) Unrelated parties purchased insurance. 4) Premiums charged were based on the commercial rates 5) The company’s capitalization was adequate.

Kidde Industries, Inc. v. U.S. (1997)
The Court held that premium payments made by brother-sister entities to the captive were currently deductible. Payments made by divisions of the parent corporation did not constitute insurance premiums deductible under IRC §162.

The Harper Group v. Com’r (1992)
Risk shifting and risk distribution were present where the captive received 29 to 32 percent of its premiums from unrelated parties. The captive arrangement was found to constitute insurance and payments made to the captive were deductible.

Sears, Roebuck and Co. and Affiliated Corporations v. Commissioner (1992)
The Court recognized the premiums were determined at “arms length”. 99.75% of premiums paid to Allstate came from unrelated insureds. The IRS’s “economic family” argument was rejected.

United Parcel Service vs. Com’r (2001)
The Tax Court sides with UPS based on the economic-substance doctrine.

Rent-A-Center, Inc. v. Com’r (2014)
On January 14, 2014 the Tax Court upheld deductions for insurance premiums paid by the parent company’s wholly owned subsidiaries to another wholly owned captive insurance subsidiary. The Tax Court found the captive to be a bona-fide insurance company, adequately capitalized and regulated, organized and operated as an insurance company, issued valid and binding policies, charged and received actuarially determined premiums and paid claims. (Rent-A-Center, Inc., 142 T.C. No.1 (2014)).

Securitas Holdings, Inc. vs. Com’r (2014)
Ruling in the Securitas vs. Commissioner captive insurance case was issued on October 29, 2014 by the United States Tax Court.  The Court found the captive insurance arrangement was valid.  It was somewhat similar to Rent-A-Center – a “brother-sister” case with a guaranty and a large percentage of the premium paid by one subsidiary.  It distinguished a guaranty from adverse cases, and looked more to the exposure units, than the concentration of risk in determining adequate risk distribution.

Benjamin and Orna Avrahami vs. Com’r (2017) Holdings, Inc. vs. Com’r (2014)
This United States Tax Court decision was issued on August 21, 2017.  It denied deductions for premiums paid to off-shore insurance companies, and determined, among other things, that elections under IRC Section 831(b) were invalid, as the amounts paid did not qualify as insurance premiums for federal income tax purposes.

The fact pattern for this case is not indicative of how compliant captive insurance companies are currently structured or managed.  The Tax Court found that the captive’s direct insurance arrangement fell short on risk distribution, as it failed to meet the minimum requirements for a valid structure.  The Court also concluded that the terrorism coverage utilized in the policy was drafted in a manner that made claims highly unlikely.  For this, and other reasons, the Court also found the risk pool was not a bona fide insurance company.

The Court also determined that the arrangement did not constitute insurance in the commonly accepted sense.  In reaching this conclusion, the Court found that the pricing was not realistic, claims were not made until after an audit was initiated, claims were not addressed in an orderly fashion, and the insurance policies were internally inconsistent.

Reserve Mechanical Corporation vs. Com’r (2018)
On June 18th, 2018 the United States Tax Court Decision for Reserve Mechanical Corp. was published. The Tax Court determined that transactions in which a foreign captive insurance company participated in were not insurance contracts for Federal income tax purposes.

This is the second case reviewing the validity of an enterprise risk captive insurance program in the last year.  As in Avrahami v. Commissioner, decided in August 2017, the Tax Court found that the insurance arrangements did not qualify as insurance for tax purposes.  Both cases were heavily fact dependent, and therefore did not create any new law with respect to captives.

While the Reserve Mechanical court did provide some additional guidance, much of the opinion merely reinforces existing thought on captive best practices.   The fact pattern for this case had some similarities to the Avrahami court case of 2017.   The case underscored that enterprise risk management basics are essential to any captive program.

Syzygy Insurance Co., Inc vs. Com’r (2019)
On April 10, 2019, the U.S. Tax Court published their ruling on the Syzygy Insurance Company case that concluded the micro-captive was not insurance in the commonly accepted sense. As with similar cases that have gone before (i.e. Avrahami), the Tax Court is great news for the captive industry as it brings clarity to the use of 831(b) arrangements and helps highlight features of non-compliant programs.

The Tax Court determined that premiums were not insurance premiums and therefore were not excluded under 831(b). The court noted that the arrangement lacked risk distribution, had no reasonable basis for allocation of premium to various coverage layers, and was not insurance in the commonly accepted sense.

The case provided a clear picture of what “not to do” when structuring and managing a micro-captive arrangement, and also provides additional clarity and reaffirmation of many of the best practices employed by Oxford Risk Management Group.