Legal Articles & Cases: Captive Insurance Management| Capstone Associated Services

Certain landmark cases have contributed to the process by which the captive insurance industry operates today. The Harper v. Commissioner case in 1992, The Malone & Hyde, Inc. v. Commissioner case in 1995, and most recently, and the Rent-a-Center v. Commissioner case in January of 2014 shed light on the need for alternative risk management options like captives—and their legitimacy. The growth of 831(b) captives and support entities such as reinsurance companies and captive managers is undeniable. Mid-market companies are seeking more comprehensive methods for insuring their risks and becoming more cost-efficient.

In this section, you will have the opportunity to read the details of each case as well as insightful legal articles. Even as new laws are passed, you will be able to see the progression of how captive insurance came into its own as a viable alternative risk management solution. The court decisions for each case act as a reminder that the ancillary benefits offered by captives combined with the supplemental risk coverage they provide is a powerful combination and option for many business owners and advisors.

We invite you to review these legal articles and cases as part of your due diligence on the captive industry.

State Independently Procured Premium Taxes

Dow Chemical Company, Appellant v. Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John Cornyn, Attorney General of the State of Texas, Appellees - This case again declared Texas' independently procured premium tax unconstitutional - Filed January 25, 2001

370 US 451 State Board of Insurance v. Todd Shipyards Corporation - Landmark U.S. Supreme Court case limiting a state's ability to tax a foreign domiciled insurer - Decided June 25, 1962

Captive Structuring and Insurance Authorities

T.C. Memo 2024-34 – Sunil S. Patel & Laurie Patel, et al. v. Commissioner of Internal Revenue, T.C. Memo 2024-34 – Filed March 26, 2024

T.C. Memo 2024-13 - Bernad T. Swift, Jr. & Kathy L. Swift v. Commissioner of Internal Revenue, T.C. Memo 2024-13 - Filed February 1, 2024

T.C. Memo 2024-2 - Terence J. Keating & Janet D. Keating, Et al v. Commissioner of Internal Revenue, T.C. Memo 2024-2 - Filed January 3, 2024

IRS Notice 2023-11 - IRS officially concedes to the CIC Services case and obsoletes Notice 2016-66. In the announcement, the IRS also issues proposed regulations on reportable transactions and Section 831(b) electing insurance companies.

CIC Services, LLC v. Internal Revenue Service, Et. Al., - The US District Court of the Eastern District of Tennessee vacates Notice 2016-66 and orders the IRS to return all documents and information produced by taxpayers and material advisors pursuant to the notice. – March 21, 2022

CIC Services, LLC v. Internal Revenue Service, Et. Al., - Opinion of the US District Court of the Eastern District of Tennessee finding the IRS exceeded its authority in issuing Notice 2016-66. - March 21, 2022

CIC Services, LLC v. Internal Revenue Service, Et. Al., - The US District Court of the Eastern District of Tennessee ruled in favor of CIC Services, issuing a preliminary injunction on the IRS from enforcing Notice 2016-66 as to CIC Services. – September 21, 2021

CCA 202134017 – IRS Office of Chief Counsel Memorandum advising IRS agents that in audits involving foreign-based captives that have elected to be treated as a US corporation for tax purposes under IRC Sec. 953(d), where the IRS has determined that the captive is not an insurance company for federal tax purpsoses, the agnet may also impose a 30% withholding tax on payments made to the foreign captive. – Released August 27, 2021

CIC Services, LLC v. Internal Revenue Service Et. Al., 593 U.S. ____ (2021) – In a unanimous opinion, the Supreme Court ruled that CIC Services can challenge the IRS and its issuance of Notice 2016-66. – May 17, 2021

IR-2021-82 – IR-2021-82 IRS News release dated April 9, 2021 on Section 831(b) captives and the Caylor captive insurance tax court case. – Released April 9, 2021

Caylor Land & Development, Inc., et al., v. Commissioner of Internal Revenue, T.C. Memo 2021-30 – Filed March 10, 2021

IR-2020-226 – IR-2020-226 IRS New release dated October 1, 2020 on “abusive micro-captive insurance schemes.” – Released October 1, 2020

IR-2020-26 - IR-2020-26 IRS News release dated January 31, 2020 on Notice 2016-66, settlement offers and captive insurance audits. – Released January 31, 2020

IR-2019-157 - IR-2019-157 IRS News release dated September 16, 2019 on time-limited settlement offers for certain captive insurance audits. – Released September 16, 2019

Syzygy Insurance Co., Inc., et al. v. Commissioner of Internal Revenue, T.C. Memo 2019-34 – Filed April 10, 2019

Benyamin Avrahami & Orna Avrahami v. Commissioner of Internal Revenue, 149 T.C. No. 7 (2017) – Filed August 21, 2017

Notice 2016-66 - Certain Section 831(b)'s captive arrangements are "Transactions of Interest" to be reported to the Internal Revenue Service – Released November 1, 2016

R.V.I. Guaranty Co., Ltd. & Subs. v. Commissioner of Internal Revenue, 145 T.C. No. 9 (2015) – Filed September 21, 2015

Securitas Holdings, Inc. & Subsidiaries v. Commissioner of Internal Revenue, T.C. Memo 2014-225– Filed October 29, 2014

Rent-A-Center, Inc. & Affiliated Subsidiaries v. Commissioner of Internal Revenue, 142 T.C. No. 1 (2014) – Filed January 14, 2014

TAM 200827006 - TAM 200827006 - Ruling discusses whether a manufacturer’s original product warranty risks covered by the Reimbursement Policies purchased by Taxpayer constitute insurable risks for federal tax purposes – Released July 4, 2008

TAM 200816029 on Partnership Entities Counted For Risk Distribution Purposes - TAM 200816029 on Partnership Entities Counted For Risk Distribution Purposes – Released April 18, 2008

Internal Revenue Bulletin: 2008-5 February 4, 2008 Rev. Rul. 2008-8 - Revenue Rule 2008-8 explains how arrangements between an individual cell and its owner are analyzed for purposes of determining whether there is adequate risk shifting and risk distribution to constitute insurance – Released February 4, 2008

IRS Issued Proposed Regulations - IRS issued proposed regulations that provide guidance regarding the treatment of transactions involving obligations between members of a consolidated group and the treatment of transactions involving the provision of insurance between members of a consolidated group

Rev. Rul 2007-47 was issued buy the US Internal Revenue Service on July 23, 2007 - This ruling holds that an arrangement that provides for the reimbursement of inevitable future costs does not involve the requisite insurance risk for purposes of determining (i) whether the amount paid for the arrangement is deductible as an insurance premium – Released July 23, 2007

Relief under 301.9100-3 - Relief under 301.9100-3 of the Procedure and Administrative Regulations granting an extension of time to file under election under section 831(b)(2))(A)(ii).” – Released April 6, 2007

Determination of Gross Receipts for Purposes of Section 501(c)(15) - Notice 2006-42 comments on The Determination of Gross Receipts for Purposes of Section 501(c)(15) – May 8, 2006

Section 23. Small Insurance Companies or Associations IRC 501(c)(15) - IRS Manual on 501(c)(15) Insurance Companies

Notice 2005-49 Qualification of Certain Arrangements as Insurance - Notice 2005-49 comments on additional guidance concerning the standards for determining whether an arrangement constitutes insurance for federal income tax purposes – Released December 5, 2005

Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellants v.STP Nuclear Operating Company, Appellee – Decided May 1, 2007

Internal Revenue Service (I.R.S.) Revenue Ruling Insurance, Federal Income Tax Purposes - In this pronouncement, the IRS discusses the qualifications of certain arrangements as " insurance" for federal income tax purposes and specifically addresses the risk distribution requirement of a purported insurance contract under four fact scenarios listed in the ruling – Released June 17, 2005

Internal Revenue Bulletin: 2003-45 November 10, 2003 - In this publication, the IRS announced that it will now consider ruling requests on the tax treatment of captives – Effective November 10, 2003

Notice 2003-34 - Notice 2003-34 – Insurance definition – offshore entities in hedge funds – Released June 9, 2003

Notice 2003-35 - Notice 2003-35- The purpose of this notice is to remind taxpayers that an entity must be an insurance company for federal income tax purposes in order to qualify as exempt from federal income tax as an organization described in 501(c)(15) – Released June 9, 2003

Tiny Insurers Face Scrutiny As Tax Shields – April 4, 2003

Insurance Loophole Helps Rich – April 1, 2003

2003 TNT 40-10 - Final Tax Shelter Regulations – February 28, 2003

Tax Shelter Prop - TD 9017 - Tax Shelter Props. Regs.- The IRS has published temporary regulations (T.D. 9017) that revise the categories of transactions that must be disclosed on returns under temporary reg. section 1.6011-4T – Effective January 1, 2003

IRS Revenue Ruling 2002-89 - In this ruling, the IRS determined that where a captive derives 50% of its premiums from underwriting its parent's risks (with the other 50% of premium revenue from unrelated parties), there was sufficient risk distribution to constitute "insurance." – December 30, 2002

IRS Revenue Ruling 2002-90 - In this pronouncement, the IRS ruled that a captive which insured 12 subsidiaries of a common parent, with no unrelated insurance underwriting, had sufficient risk distribution to constitute "insurance." – December 30, 2002

IRS Revenue Ruling 2002-91 - In this ruling, the IRS determined that if within a group captive no one member's covered risks exceeded 15% of the group's total risks, then that captive possessed sufficient risk distribution to constitute "insurance." – December 30, 2002

PLR 200242005 - Ruling on Risk Retention Groups – Released October 18, 2002

PLR 200242023 - Relief for late filed 953 (d) election granted under 301.9100-3(a) – Released October 18, 2002

Part III - Administrative, Procedural, and Miscellaneous Certain Reinsurance Arrangements Notice 2002-70 - In this November 2002 pronouncement, the IRS announced that captive transactions utilizing certain reinsurance arrangements (so-called "PORCs") resulting in shifting of income will be "listed transactions" for purposes of Reg. Sec. 1.6011-4 – Effective October 15, 2002

Cumulative Bulletin Notice 2001-51, I.R.B. 2001-34, August 2, 2001 - On February 28, 2000, the Internal Revenue Service issued Notice 2000-15 , 2000-12 I.R.B. 826, identifying certain transactions as "listed transactions" for purposes of §1.6011-4T(b)(2) of the temporary Income Tax Regulations and §301.6111-2T(b)(2) of the temporary Procedure and Administration Regulations. This notice restates the list of transactions identified in Notice 2000-15 as "listed transactions" effective February 28, 2000, and updates the list by adding transactions identified in notices released subsequent to February 28, 2000 – Released August 2, 2001

Rev. Rul. 2001-31, 2001-26 I.R.B. 1348 (6/25/2001) - In this ruling, the IRS abandoned the "economic family" doctrine which the Service used to attack captive planning – Decided June 25, 2001

TREAS. REG. Section 1.337(d)-4 abd Exempt Organizations - The IRS issued final regulations generally affecting a taxable corporation that transfers all or substantially all of its assets to a tax-exempt entity or converts from a taxable corporation to a tax-exempt entity in a transaction other than a liquidation

United Parcel Service of America, Inc. v. Commissioner of Internal Revenue, 254 F.3d 1014 (11th Cir. 06/20/2001) - In this significant case, the taxpayer's tax motivation for forming a captive was upheld in a $2 billion victory for the taxpayer - Decided June 20, 2001

Kidde Industries, Inc. v. United States 40 Fed.Cl. 42 (Fed.Cl. 1997) - Holds that Humana case applies to brother-sister subsidiaries and not divisions – Decided December 31, 1997