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.