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Tax Notes Quotes Rachel Partain on IRS Challenging Captive Insurance Arrangements

June 20, 2018, Tax Notes

The Tax Court granted the IRS another victory June 18, adding to the agency’s arsenal for combating abusive captive insurance arrangements, but the opinion failed to offer additional guidance for taxpayers.

. . .

Rachel L. Partain of Caplin & Drysdale, Chtd. pointed out that the court looked at subsequent events — the post-formation claims filing history — to determine that “the business purpose for forming the captive was not the result of concerns about increased risks.”

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Laser Focused

“The important takeaway for future small captive cases and transactions is that the Tax Court is laser-focused on risk distribution, specifically risk distribution of the pooling arrangement,” Partain said. She noted that the court applied a nine-factor test to determine whether the pooling vehicle constituted a valid insurance company.

. . .

According to Partain, the court “merely states that the petitioner did not have sufficient risk units, and taxpayers are left with no guidance about how to analyze risk units in the closely held context.”

Partain said the court concluded that Reserve’s direct risks were insufficient for risk distribution after pointing to the number of employees and vehicles insured in two cases that did not involve a small captive: Rent-A-Center Inc. v. Commissioner, 142 T.C. 1 (2014), and Securitas Holdings Inc. v. Commissioner, T.C. Memo. 2014-225. However, closely held companies such as Reserve don’t operate in 50 states or have the number of risks of a large company, Partain said, noting that otherwise their coverage would exceed the $600,000 threshold in section 501(c)(15).

. . .

Left for Another Day

Partain said the IRS has repeatedly tried to challenge small captives on the primary ground of lack of economic substance, as it did in Reserve. Because the Tax Court concluded in both Avrahami and Reserve that the arrangements weren’t insurance transactions, it had said it didn’t need to address that argument.

For the full article, please visit Tax Notes' website (subscription required).

Excerpt taken from the article "Microcaptive Insurer Case Leaves Open Questions" by Emily Foster for Tax Notes.

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