Starting in the mid-1970s, and continuing through the UPS case, the IRS fought captives tooth and nail. Over the course of these cases, they advanced three different legal arguments against captive insurance: the economic family argument, the nexus of contracts and the assignment of income doctrine.
However, it’s important to ask this question regarding the IRS’ legal battle: “what was it about captives that the IRS didn’t like?” To answer that question, we need to go back to a series of cases from the early 20th century called the reserve cases. In all of these cases, a taxpayer foresaw a particular adverse event and started to place money into a reserve fund in anticipation of future payment. In all of these cases, the taxpayer attempted to deduct the amount paid into the fund as a legitimate, section 162 deduction. The Bureau of Tax Appeals (B.T.A.) heard all of these cases and struck down the deduction. They advanced several reasons for these denials.
1. The tax code allowed a deduction for business expenses, but not for amounts paid into an internally held reserve. This is supported by a strict reading of the statute.
2. Moving funds internally – from cash to a reserve or from one corporate “pocket” to another – does not shift the risk as required by insurance.
3. Preventing the manipulation of gross income through the use of “reserves” and “contingency funds” as outlined in the case Spring Canyon Coal.
4. Both accrual and cash accounting methods require the taxpayer to deduct specific “realized” amounts. A taxpayer cannot deduct a speculative amount.
If you would like to hear more about captive insurance, you can join us for a webinar on May 4, 2017. The course, Introduction to Captive Insurance, will provide the accountant with an overview of captive insurance as a business structure. The program contains the following sections:
- What is Insurance?
- What is an Insurance Company?
- A Brief History of Captive Insurance
- A Brief Case Law History of the IRS’ unsuccessful attempt to challenge captives
- The contents of section 831(a)
- The process of Forming, Running and Shutting Down the Captive
Our next class is Thursday, May 4 at 10 AM Pacific. The cost is $50. Once you purchase the course, we’ll send you a sign-up link.
In order to be awarded the full credits, you must be respond to all polling questions asked during the program.
Participants will earn 1.0 CPE credit
Field of Study: Business Law.
Advanced Preparation: None
Who Should Attend: Anyone interest in learning about captive insurance.
Delivery Method: Group Internet Based
This presentation will provide the CFP professional with 1-hour of CLE credit. There will be a 20-question test at the end of the program; the attendees must score above a 70 to obtain full credit.
The presentation will be given by F. Hale Stewart of The Law Office of Hale Stewart. He is also co-author of the leading legal text in the area of captive insurance, titled U.S. Captive Insurance Law.
Sign Up Here!