The UPS case is the last big captive case. However, there is a bit of history between UPS and Harper that we need to explain before moving forward.

In the 1990s, the IRS expanded the scope of their captive litigation, targeting bigger companies. Humana was one of the first truly large, fortune 500 style companies subject to captive litigation. It was not the last. Harper (which I discussed last week) was a large, international company. The service went so far as to argue Allstate — then a subsidiary of Sears — was a captive, even though Allstate wrote a a very small part of their business with Sears. UPS fits with this general case theory of the service generally targeting larger companies after establishing a legal foundation with smaller companies. However, this tactic did not work. The dam started to burst with the Humana (see here, here and here). Read More

Today’s posting will be a bit shorter than most. Although they lost the Humana case, the service continued to file challenges to various captive insurance arrangements. The Harper case — which was a 1991 decision — is important because it gives us a three prong test which a captive must comply with in order to be a “bona fide” captive. The following is from my book:

The court introduced a new three-prong test to determine “the propriety of claimed insurance deductions by a parent or affiliated company to a captive insurance company.” The three prongs are:

(1) whether the arrangement involves the existence of an “insurance risk”; Read More

For background, please see Humana Part I and Humana Part II:

By way of background, in Part I, we looked at the background facts of the case, and learned that Humana was a near-perfect set-up for a captive. The company was forced by business circumstances to form a captive, considered a variety of options (and obviously documented same) and then formed a stand-alone company that was adequately capitalized, independently managed and charged a fair price for its insurance. In Part II, we see a very well tried case for the plaintiff who take full advantage of the facts. In addition, we get the first real explanation (at lease in a case record) of the thinking behind the economic family doctrine. Finally, we see the first real cracks in the economic family doctrine, thanks to some of the insureds not being owners of captive stock. As such, the Read More

Below is an excerpt from my book on the Humana case. As an aside, if you get a bit confused by some of the terms used, you may want to go back and read some of the earlier posts on the captive cases.

Humana lost the trial case but filed a petition for reconsideration. The tax court withdrew its memorandum opinion and issued a full opinion after review by the 19-person court. The written opinion contains a 12-member majority opinion, an 8-person concurrence, a 2- member concurring and a 7-member dissent. The sole reason for Humana’s petition was to get a long opinion which the company could use for the basis of an appeal.

The court first notes the many captive cases heard before Humana that apply directly to Read More

Just to provide some context before moving forward, we’ve been looking at the captive cases in chronological order. We finished with the economic family doctrine. In the conclusion of my analysis to those cases I noted that, most importantly, the IRS was very prepared for captive litigation while the taxpayers weren’t. As a result, the IRS gained a strategic foothold in captive jurisprudence. With Humana, we see the first really good taxpayer push back against the IRS’ efforts. To that end,we’ll be spending some time delving into the decision’s details. The following is an excerpt from my book, U.S. Captive Insurance Law.

Humana was a groundbreaking case because it was the first major victory for a taxpayer in the captive insurance area. Humana was (and is) a publicly traded health care Read More

When looking at the economic family cases, it’s important to have some type of structure. Therefore, I’ll be using the fact patterns outlined in Revenue Ruling 77-316 and then looking at the cases which most resemble those fact patterns. What follows is an excerpt from my book U.S. Captive Insurance Law.

The first fact pattern outlined in Revenue Ruling 77-316 is entirely insular:

During the taxable year domestic corporation X and its domestic subsidiaries entered into a contract for fire and other casualty insurance with S1, a newly organized wholly owned foreign “insurance” subsidiary of X. S1 was organized to insure properties and other casualty risks of X and its domestic subsidiaries. X and its domestic subsidiaries Read More

In my previous post (Captive Cases Series – The Flood Plane Cases, Part I), we looked at the first flood plane case Consumers Oil. This week, we’ll take a look at the second flood plane case — U.S. v. Weber Paper Company.

To place this case in perspective, here is a bit of relevant history:

In mid-July 1951, heavy rains led to a great rise of water in the Kansas River and other surrounding areas. Flooding resulted in the Kansas, Neosho, Marais Des Cygnes, and Verdigris river basins. The damage in June and July 1951 exceeded $935 million dollars in an area covering eastern Kansas and Missouri, which, adjusting for inflation, is nearly $7 billion dollars in 2005.[1] The flood resulted in the loss of 17 lives and displaced 518,000 people.[2] Read More